Supports and Resistances

Starting
to trade

Introduction to
Supports and Resistances

Support and resistance are probably some of the most used elements in trading. There are many different ways to trace supports and resistances, it could even be stated that each trader has their own way of plotting them. Here we will see the basics on this topic:

In the following chart we can see an upward trend. In this case, when the price moves up and then makes a pull back (or correction), the highest point that the price has reached is considered a resistance.

Likewise, the lowest point of the correction will be considered a support. You can see that constant support and resistance form throughout the price movement.

In the following chart we can observe a downtrend. In this case, when the price moves down and then makes a pull back (or correction), the lowest point that the price has reached before the correction is considered support.

Likewise, the highest point after the correction will be considered a resistance. Various supports and resistances will form throughout the price movement.

Supports and Resistances
Chart Representation

It is important that you know that support and resistance levels are not exact figures. Maybe when you see real-time market charts you will see supports and resistances that appear to be broken but really the market was just testing them. In the case of Japanese candlestick charts, this test is observable thanks to the shadows of the candles.

In the previous chart we can see how the candles tested the resistance level of 1.0000. It may look like the market was going to break the resistance but as you can see, the closing price of the candles is below the resistance level, which means that the price was only testing that level.

How to know if a support or resistance has been broken?

There is no single answer to this question, some claim that support is broken when the price closes below the support level and that resistance is broken when the price closes above the resistance level. However, this is not always true and in the following chart, we will see why.

In this last chart we can see that the price closed twice above the 162.00 resistance level, however, both times the price ended up falling. If you had considered them true breakouts and decided to buy, you would not have done very well. What’s more, these false breakouts have served to further consolidate that level of resistance.

How to avoid false breakouts?

The best thing you can do when talking about supports and resistances is to work them as zones rather than specific numbers.

How can you do this?

One way to do this is to plot the supports and resistances on line charts and then switch to the candlestick chart.

Why draw them on a line charts?

Line charts show you only the closing price while the candlestick chart shows you the highs and lows which, especially if you’re just starting out, can be quite confusing.

Here you can see an example of supports and resistances plotted in line charts:

And this is what it will look like when you change the chart to candles:

There are two very important things to know about supports and resistances:

When a resistance is broken, it can be used as a good benchmark for future support. The same happens when a support is broken, it can be used as a future resistance.

The more times the price tests a support or resistance level, the more solid that zone becomes. What does it mean to be more solid? That if the price tests it again in the future, it is more likely that it will not be able to break it.