Why are support and resistance important to traders: A comprehensive operational guide

When it comes to trading, many people often ask how to know which points are good to buy and which are good to sell. The answer lies in one fundamental concept called Support and Resistance, which are basic tools that, once understood, are sufficient to build your own trading system.

Basic Understanding of Support and Resistance

Support (Support) is a price level where the price has moved down and is likely to stop falling or reverse upward. It can be thought of as a reliable floor below which the price is unlikely to drop further. Conversely, Resistance (Resistance) is a price level where the price has moved up and is likely to stop rising or reverse downward. It appears as a ceiling that prevents further upward movement.

An interesting aspect is that when support is broken, it often turns into resistance, and vice versa.

Why Support and Resistance Work: Economic and Psychological Perspectives

Explanation from an Economic Perspective

Prices fluctuate because of the balance between demand (Demand) and supply (Supply) that change over time. When the number of sellers exceeds buyers, prices tend to fall until they reach a level where buyers see the price as cheap. Then, buyers start purchasing, causing the price to stop falling and reverse upward—that’s support. Similarly, when buyers outnumber sellers, prices rise until reaching a level where sellers want to take profits. Then, the number of goods sold increases, and prices stop rising and retreat—that’s resistance.

Explanation from a Psychological Perspective

In fact, support and resistance work because of trader behavior. In the market, there are three groups: those who buy and wait for prices to go up, those who sell and wait for prices to go down, and those who are on the sidelines waiting for opportunities.

When the price tests a previous low, buyers who have already bought will buy more, thinking the price will go up from this point. Sellers who have already shorted will buy back to close their positions. Meanwhile, sideline traders see this as a good buying opportunity. This results in a large buying force at this point, causing the price to reverse upward—that’s psychological support.

Similarly, for resistance, buyers may want to sell to take profits, sellers may sell more to cut losses, and sideline traders may sell, preventing the price from rising further.

Principles of Finding Support and Resistance: Techniques to Know

( 1. Trendline )Trendline###

This method is used to find support and resistance in clear trends. In an uptrend, draw a line through the higher lows (Higher Low) points to establish support, and draw a line through the higher highs (Higher High) to establish resistance. In a downtrend, draw a line through the lower highs (Lower High) for resistance, and through the lower lows (Lower Low) for support.

( 2. Round Numbers )Round Number###

Numbers ending with 0 have psychological significance, such as $100, etc. When prices approach these levels, people often perceive something important happening, making these levels strong support or resistance.

( 3. Moving Averages )Moving Average$1000

The average of closing prices over several periods, such as 10, 50, or 200 days. In an uptrend, moving averages often act as support; in a downtrend, they tend to act as resistance because prices usually stay above the moving average in an uptrend and below it in a downtrend.

4. Fibonacci Retracement (Fibonacci Retracement)

This tool uses mathematical ratios ###23.6%, 38.2%, 61.8%, 78.6%( to identify potential reversal points. For example, if the price rises and then pulls back, a 23.6% retracement level might be around $17.64, indicating weak support, while 61.8% at around $14.24 indicates stronger support.

) 5. Price Gaps (Gap)

When prices jump without trading in between, it creates a gap. These gaps often become support or resistance levels where no one holds a position. In an uptrend, gaps act as support; in a downtrend, they act as resistance.

Using Support and Resistance in Trading

$10 Strategy 1: Trading Range $20 Trading Range###

When the price lacks a clear trend but moves between support and resistance levels, buy near support and sell near resistance repeatedly until the price breaks out of the range.

( Strategy 2: Reversal Trading )Price Reversal###

In an uptrend, when the price hits resistance, prepare to sell; in a downtrend, when it hits support, prepare to buy. Be cautious to ensure the price truly reverses and does not just test the level.

( Strategy 3: Breakout Trading )Breakout###

When the price breaks through support or resistance with high trading volume, follow the breakout in the direction of the move. The support level that is broken becomes new resistance, and the resistance level that is broken becomes new support.

Precautions When Using Support and Resistance

( Point 1: Do not go against the trend

The fundamental principle is that the trend is your friend )Trend is your friend###. In an uptrend, avoid shorting; in a downtrend, avoid buying. Even if you enter at support or resistance, the risk lies in the trend continuing to new highs or lows of the main trend.

( Point 2: Beware of false breakouts )False Breakout###

Sometimes prices break support or resistance but then move back inside the range. False breakouts are usually accompanied by low volume. Always set clear stop-loss points.

( Point 3: Be cautious of levels tested multiple times

When support or resistance is tested many times, the likelihood of a breakout increases. The older the level, the higher the chance it will fail. Do not overly rely on the same levels.

Summary

Support and Resistance are the foundation of technical analysis. They are not exact science but tools that can be explained through economics )Demand and Supply### and psychology (Trader Behavior). Traders who use these tools with faith and proper risk management can develop effective trading systems. Most importantly, practice on real charts to visualize and avoid common mistakes.