If you are already a trader, you should know how important it is to identify support and resistance levels. Once you develop this skill, you will be able to understand price action and determine the exact moment to enter or exit an open position. So, let’s find out how to identify the moment when the share price wants to break through the support/resistance level using Binomo as an example.
Support and Resistance Levels
Support and resistance levels are the ranges within which share prices fluctuate. The simple is that prices will not exceed or fall behind these levels for a particular period.
The share prices keep fluctuating over time, but after hitting a specific upper limit, they bounce back. This upper limit is called “resistance”.
Likewise, there is a lower price point to which the value of an asset reaches before rising again. This lowest price line is what traders call “support”.
A support/resistance level is considered strong if the stock price hits the upper and lower limits several times before breaking out. When at a weak support/resistance level, the price reaches the limits only once before bouncing back. The stronger the support/resistance level, the more effectively it can counter stock price momentum.
How to know that the price will soon break through support or resistance?
Traders need to understand market trends and identify upcoming stock price breakouts to make timely decisions to enter or exit a trade. Here are some of the ways you can predict when a price breaks support/resistance levels.
Candlestick charts analysis
To begin with, you should determine the dominant trend using a candlestick chart. If it’s a strong one, you’ll observe larger candles forming more frequently. In most cases, two or more consecutive candles of the same color can be seen.
Economic event/news
In addition, you can anticipate a headline or economic event to strengthen the price momentum. Prices will move in a specific direction shortly after the news is released, frequently breaking through the support and resistance levels.
Price сonsolidation
Occasionally, the share price consolidates just before it encounters the support/resistance level. In other words, the price fluctuates within a small range. The price builds considerable momentum to break through as it gets closer to the support/resistance level. However, before the breakthrough, the price frequently reverts to the range.
Avoiding false breakouts
False breakouts can be observed when the share price exceeds or falls behind the upper and lower limit and then instantly gets back within the support/resistance range. The price falls back before a trend reversal.
Most traders lose their funds during such false breakouts. Avoid these false breakouts by examining the price behavior during strong support or resistance breakthrough. To make it more clear, you need to understand the trend. In an actual price breakthrough, the prices will start to decline. However, if you observe that prices stay up the resistance level after they break through, then don’t be misled. It is a false breakout.
What to do after the price breakout?
You can anticipate that the trend will proceed in the same direction if the price crosses over weak support or resistance. However, you must consider a specific price behavior after it reaches a strong support or resistance level. Most of the time, you will see that the prices follow a downtrend. In that case, we suggest you wait for the market to restore its previous pattern (when the breakthrough occurs). That will indicate the right time for you to rejoin trading.
Most traders make a mistake when they invest when the market is overextended and about to reverse. It may be because they thought the trend would increase. However, experienced traders know that waiting until markets revert to what they did when prices reached the resistance level is the key. In that case, the downward trend starts indicating the right time for us to start selling.
Reading your chart is a crucial thing in trading. We recommend using a larger time frame than your trading sessions. For example, if you are trading 5-minute candles, you should read the 30-minute or 3-hour chart.
To make trading easier for yourself, we also recommend using indicators. Bollinger Bands is one of the understandable indicators. It can be used in different ways. For example, when the share price declines and is about to break the lower band, the Bollinger Bands indicator will signal you to go short.
Conclusion
Support/resistance trading is a skill that takes a lot of practice and effort to master it. Once the share price breaks through the support or resistance, your goal should be to determine the best trade entry position.
You are just a few steps away if you want to learn how to trade support/resistance. Use the Binomo free demo account to learn how to recognize support and resistance levels and tell how the share price will behave.
