By: Montana Timpson
Support and resistance, one of the most widely followed technical analysis techniques, refers to price points beyond which a stock is not expected to fall or rise based on various concentrations of demand or buying interest — helping active traders identify price points on a chart where the probabilities favor a pause or reversal of a prevailing trend.
As a staple in technical analysis and every investor’s trading toolkit, support and resistance can be utilized in many professional trading strategies. Here are three of the top support and resistance trading strategies to live by.
Range trading is a trading strategy in which active traders seek to identify and capitalize on stocks trading between established support and resistance trendlines. By using support and resistance as measures of technical analysis in range trading, active traders can better determine which price level they should enter and exit their positions for the highest likelihood of profitable trades — if a security is in a well-established trading range, traders often look to buy when the price of a security approaches the support level and sell when it reaches the level of resistance.
Support and resistance can also help determine best price points for stop losses and limit orders.
Because range trading involves identifying significant price levels, some of the technical analysis strategies used with range trading besides support and resistance include volume trends, VWAP, and moving averages.
A breakout is a potential trading opportunity that occurs when an asset’s price moves above a resistance level or moves below a support level on increasing volume. Breakout trading is a trading strategy in which active traders enter a long position after a stock price breaks above resistance or enters a short position after a stock breaks below support. While range-bound strategies rely on price respecting support and resistance levels, breakout trading strategies rely on anticipating price breaking levels of support and resistance for success.
As with range trading, support and resistance can help determine best entry and exit points in breakout trading. Once prices are set to close above a resistance level, breakout traders often establish a bullish position. When prices are set to close below a support level, breakout traders often take on a bearish position. Factors such as trading volume should be taken into consideration, as well, to help determine whether prices will sustain the levels they’ve broken out of, but support and resistance are key metrics in the technical analysis of breakout trends.
Trendlines, highlighting a trend or range, are a visual representation of support and resistance over any given time frame. Trendline trading is a trading strategy in which active traders use trendlines to show direction and speed of price, helping traders predict patterns during periods of price contraction.
A trendline connects a swing low to a swing high, from the lowest point of the downward movement to the highest point in the upward movement. When the price rises, the trend line rises accordingly. Connecting these lows with a line results in an ascending trendline, showing an upward price trend. A trendline can also be drawn along the individual swing highs, which can show the angle of ascent, the strength of the price move and the relative strength of the trend. The same trend can be charted in reverse when price falls and trendlines plot the angle of descent and the strength of the downward price movement.
In a trendline trading strategy, during an uptrend, buying or going long opportunities may occur when a short-term downtrend meets the overall ascending trendline. During a downtrend, selling or shorting opportunities may occur when a short-term uptrend meets the overall descending trendline, making trendlines a helpful tool for active investors seeking best probabilities of success in their trades.
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