How To Trade Based on Support and Resistance Levels

Make Better Trading Decisions

Support and resistance are common terms among traders, yet most new traders don't know how to use support and resistance to make trading decisions. They grasp the vague concept that support is where the price tends to stop falling, and resistance is where the price tends to stop rising. Yet, making trading decisions based on that vague definition will likely lead to a depleted trading account.

To use support and resistance effectively you first need to understand how asset prices typically move, so you can then interpret support and resistance from that framework. There are also different types of support and resistance, minor or major (weak or strong). We almost expect weak levels to be broken, while strong levels are more likely to hold and cause the price to move in the other direction. With this information, you can start making better decisions based on support and resistance.

Trends, Ranges and Support and Resistance

Support and resistance levels for trend and chart patterns
EURUSD 1-Minute Chart with Various Types of Support and Resistance. MT4

Support and resistance are highlighted with horizontal or angled lines (called trendlines). If the price stalls out and reverses in the same price area on two different occasions (without moving past that level), then a horizontal line can be drawn to show that the market is struggling to move past that area.

In a trend, though, the price is making higher highs and higher lows (uptrend) or lower lows and lower highs (downtrend). Connecting the highs and lows during a trend will produce an angled line, which may provide some indication of where the price will find support or resistance in the future (if the trendlines are extended out to the right).

These tools highlight trends, ranges, and other chart patterns. They provide traders with a visual of how the market is currently moving and what it could do in the future (keep reading).

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Major and Minor Support and Resistnace

minor and major support and resistance on 1-minute chart
Gold futures 1-minute chart with minor and major support and resistance. MT4

Minor support and resistance levels are almost expected to be broken. For example, if the price is trending lower, it will make a low, then bounce, and then start to drop again. That low can be marked as a support area (the price did stall out and bounce off that level), but since the trend is down, the price is likely to fall through that support level without much problem.

Minor support or resistance provide analytical insight, and possible trading opportunities (discussed later). In the example above, if the price does drop below the minor support level, then we know the downtrend is still intact. But, if the price stalls and bounces at/near the former low then a range could be developing. If the price stalls and bounces above the prior low then we have a higher low and that is an indication of a possible trend change.

Major support and resistance are price areas that caused a trend reversal. If the price was trending higher and then reversed into a downtrend, where the price reversed from is a strong resistance level. Where a downtrend ends and an uptrend begins is a strong support level.

When the price comes back to a major support or resistance area, the price will often struggle to break through it. The price may eventually break through it, or bounce the other way, but often the price retreats from the level (or oscillates around a strong level, like it does in the attached chart) a number of times before doing so.

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Trading Based on Support and Resistance

trading based off support and resistance
Gold futures 1-minute chart with potential trades based on trend and support and resistance. MT4

The basic trading method for using support and resistance is to buy near support in uptrends, ranges or chart patterns, and to sell/short-sell near resistance in downtrends, ranges, and chart patterns.

It helps to isolate a longer-term trend, even when trading within a range or chart pattern. The trend provides guidance on the direction to trade in. For example, if the trend is down but then a range develops, preference should be given to short-selling at range resistance (instead of buying at range support). The downtrend lets us know that going short has a bit better probability of working out, compared to buying. If the trend is up and then a triangle pattern develops, favor buying near support of the triangle pattern.

Buying near support or selling near resistance can pay off, but there is no assurance that the support or resistance will hold. Therefore, consider waiting for some confirmation that the market is still respecting that area. If looking to buy at support, consider waiting for the price to consolidate (move sideways for several price bars near support or resistance), as this lets you know the price is still stalling at support/resistance. You can also wait for the price to bounce off support or resistance, taking a trade once that occurs.

If buying near support, I like to wait for a consolidation in the support area, and then buy when the price breaks above the high of that small consolidation area. That lets me know the price is still respecting the support area, and also that the price is starting to move higher off of support--and if we are buying that is what we want. The same concept applies to selling at resistance--I like to wait for a consolidation near the resistance area, and then enter a short trade when the price drops below the low of the small consolidation.

If buying, a stop loss can go several cents below support, and if shorting a stop loss can go several cents above resistance.

If waiting for the consolidation, then the stop loss goes a couple cents (or ticks or pips) below the consolidation if buying. If selling, the stop loss goes a couple cents above the consolidation.

When entering a trade, have a target price in mind for a profitable exit. If buying near support, consider exiting just before the price reaches a strong resistance level. If shorting at resistance, exit just before the price reaches strong support. You can also exit at minor support and resistance levels--for example, if buying at support and selling at resistance within an upward trend channel. But in some cases you may be able to extract more profit if you let a breakout occur. For example, if buying near triangle support (within a larger uptrend), you may wish to hold the trade until it breaks through triangle resistance and continues with the uptrend. Then look to exit at the next resistance area.

There is also a concept that old support can become new resistance, or vice versa. This isn't always the case, but does tend to work well in very specific conditions. See the 'Second Chance Breakout' Day Trading Strategy.

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False Breakouts

False breakout Strategy Example
False breakout Strategy Example (ES Futures, 610 Tick Chart). NinjaTrader

Asset prices will often move slightly further than you expect them to. This doesn't happen all the time, but when it does it is called a false breakout. If your analysis shows that there is support at $10, it is quite possible that the price could drop through $10, to $9.97 or $9.95 (for example), and then start to rally again. Support and resistance are areas, not an exact price. So expect some variability in how the price acts around support and resistance. It is unlikely to stop at the exact same price as before.

False breakouts are actually excellent trading opportunities, see Day Trading False Breakouts. One strategy is to actually wait for a false breakout, and enter the market only after it occurs. For example, if the trend is up, and the price is pulling back to support, let the price break below support (or below a consolidation that forms) and then buy when the price starts to rally back above support (or the consolidation). This gives a bit of extra confirmation to the trade, since it tried to go lower one last time but couldn't. Similarly, if the trend is down, and the price is pulling back to resistance, let the price break above resistance (or above consolidation that forms) and then short-sell when the price starts to drop below resistance (or the consolidation).

The downside of waiting for false breakouts is that a false breakout won't always occur. So waiting for one means some good trading opportunities will be missed. Therefore, it is typically best to take trading opportunities as they come, and if you happen to catch the odd false breakout trade, that's a bonus. But because false breakouts do happen on occasion, that is why our stop loss is placed a bit of distance away from support or resistance, so that the false breakout isn't likely to hit our stop loss before moving in our anticipated direction.

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Adapting Trading Decisions to New Support and Resistance Levels

Support and resistance are dynamic, and our trading decisions based on them also need to be dynamic. In an uptrend, the last low and last high are what is important, because if the price makes a lower low it indicates a potential trend change, but if the price makes a new high that helps confirm the uptrend. So we must constantly be focusing our attention on the support and resistance levels that matter right now.

Mark major support and resistance levels on your chart, as they could become relevant again in the future if the price approaches those levels. Delete them once they are no longer relevant--for example, if the price breaks through a strong support or resistance area and continues to move well beyond it.

Also, mark the current and relevant minor support and resistance levels on your chart. These will help you analyze the current trends, ranges, and chart patterns, but these levels lose their relevance fairly quickly as new minor support and resistance areas form. Keep drawing the new support and resistance areas, and delete support and resistance lines which are no longer relevant (price has broken through them).

If day trading, focus on today and don't get too bogged down with figuring out where support and resistance is from prior days. This can easily result in information overload. Focus on what is happening now, and mark today's support and resistance levels as they form.

For more tips like this, see My Tactical Day Trading Cheat Sheet.

Final Word

There are strong and minor support and resistance areas. Both can provide trade signals. Attempt to buy near support and short-sell near resistance, especially when the trend confirms trading in that direction. Trading off support and resistance requires adaptability because support and resistance areas are constantly being created and destroyed. You can only trade off the information you have at the time, which is why it is often prudent to wait for some confirmation that a support or resistance area will hold. Before taking a trade wait for a consolidation, a bounce off support or a decline off resistance. My preferred method is to wait for a consolidation at support, and then buy when the price breaks above the high of the consolidation. On the flip side, I like to short-sell at resistance when the price forms a consolidation and then breaks below the low of the consolidation. Trading off support and resistance takes lots of practice. Work on isolating trends, ranges, chart patterns, support, and resistance in a demo account. Then practice taking trades, with targets and stop losses. Only once you are profitable for several months with your support and resistance trading method should you consider trading real money.