Support and Resistance Level Strategy
Support and resistance levels are horizontal price levels that usually connect the high of a bar to the high or low of another price bar, forming a horizontal level on the price chart.
A support or resistance level is formed when the market price action reverses direction and changes direction, leaving a peak or trough (swing point) in the market. Support and resistance levels can carve out trading ranges as traders see in a trending market, when the market retraces and leaves a swing point.
Prices will often hit these support and resistance levels, in other words, support and resistance levels tend to hold the price movement in check, until the price breaks through it. Another major way to create support and resistance levels in the market, is from swing points in a trend. As the market trend, it retraces the trend and these retracements delay the 'swing points' in the market, which in an uptrend look like peaks and downtrends look like troughs.
In an uptrend, old tops will tend to act as support once price breaks past them and then retraces to test them. In a downtrend, the opposite is true, the old trough will tend to act as resistance once the price breaks it and then retraces to test it.
How to Trade Price Action Signals from Support and Resistance Levels
Support and resistance levels are the 'friends' of price action traders. When a price action entry signal forms at a key support or resistance level, it can be a high probability entry scenario. Key levels provide traders with a 'barrier' to placing a trader's stop loss outside and because they have a strong chance of being a turning point in the market, there is usually a good risk-reward ratio forming at key support and resistance levels in the market.
Price action entry signals, such as pin bar signals or others, give traders some 'confirmation' that price may indeed be moving away from a key level of support or resistance.
In this case, the uptrend and the previous swing high in the uptrend eventually 'reverse' to a support level after the price broke above it. Traders can see that when the price returns to retest that level a second time, it forms a good pin bar entry signal to buy the market and re-enter the uptrend from the confluence level in the market.
Tips for Support and Resistance
- Don't get too carried away trying to draw every tiny level on a trader's chart. Aim to find the main daily chart levels, as these are the most important.
- The horizontal line of support or resistance that the trader draws will not always touch the 'exact' high or low of the connected bar. Sometimes, it's okay if the line connecting the bars slightly goes down from the high or goes up from the low. The important thing to realize is that this is not an exact science, but rather a skill and art that a trader will improve through training, experience and time.
- When in doubt whether to take a certain price action entry signal or not, ask the trader whether the signal is at a key support or resistance level. If it is not at a key support or resistance level, it may be better to continue the signal.
- Price trading strategies, such as pin bar, fakey, or inside bar strategies have a much better chance of succeeding if they form from converging support or resistance levels in the market.
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