Simple Trading Guide with Support and Resistance

This article is for traders who prefer a straightforward and effective trading style without relying heavily on numerous indicators.

Many believe support occurs when there are more buyers than sellers, and resistance forms when there are more sellers than buyers. However, this isn’t entirely accurate. A single large buyer can counter hundreds of sellers and push the market up, while a large seller can counter thousands of buyers and drive the market down. Thus, it’s the size of the buy and sell orders, not the number of buyers or sellers, that moves the market. Support is where buying volume exceeds selling volume, and resistance is where selling volume exceeds buying volume. Think of support as the floor and resistance as the ceiling. If you throw a ball on the floor, it bounces up; if you throw it at the ceiling, it bounces down.

Why Identify Support & Resistance?

Identifying support and resistance levels on your charts is crucial because these are potential market turning points that can aid in making trading decisions. For instance, in a sideways market nearing a key support level, it could be a viable buy point. Conversely, if you’re holding a long position, you might want to close or partially close your trade before reaching a significant resistance level. Identifying these levels allows you to enter high-probability trades and determine optimal profit-taking points. Here are some simple methods to do this.

Simple Trading Guide with Support and Resistance

Past Highs and Lows

The first indicators of support and resistance are past highs and lows. These historical price points represent crowd psychology’s turning points and are particularly effective in sideways markets. These levels show where buying or selling pressure previously reversed the price, and if revisited, the price might reverse again.

Example 1: Previous Highs and Lows

  • When the market approaches past highs and lows, it often reverses. For instance, if the price nears a previous low, wait for a breakout below this level. After the breakout, look for bullish candlestick patterns such as Bullish Pin Bar, Bullish Piercing, or Bullish Engulfing, with the price closing above the previous support. Place a stop loss just below the bullish pattern.

Using EMA

Exponential Moving Averages (EMA) serve as dynamic support and resistance levels, effective in trending markets. Unlike static levels, EMAs adjust to market conditions.

Example 2: EMA Levels

  • Using the 20 EMA and 50 EMA, the market often bounces off these levels in a trend. For instance, in an uptrend confirmed by the 20 EMA above the 50 EMA, if the price retraces to the 50 EMA and forms a bullish reversal pattern like Bullish Engulfing or Bullish Pin Bar, it signals a buy opportunity. Place a stop loss below the bullish pattern.

Example 3: Double Bottom

  • At a previous low, if the market forms a double bottom, wait for a breakout and a bullish reversal pattern above the previous low. For example, a Bullish Engulfing pattern forming after the breakout confirms strong buying pressure. Place a stop loss below the pattern.

Example 4: V-Bottom

  • A V-Bottom, forming a V shape, is less common but highly reliable. If a Morning Doji Star forms at a V-Bottom, especially at strong support, it indicates a strong buy signal. For instance, if the price forms a V-Bottom and a Morning Doji Star at the support level, place a stop loss below the pattern.

Example 5: Bullish Divergence

  • Combine Morning Doji Star with bullish divergence using the Stochastic oscillator. If the market makes a lower low while Stochastic makes a higher low, and a Morning Doji Star forms at this divergence, it signals a strong buy. Place a stop loss below the pattern.

By integrating these strategies, you can effectively trade using support and resistance, maximizing your trading opportunities with high-probability setups.