Introduction to Support/Resistance Trading Strategies
Trading in the financial markets involves a variety of strategies, each with its own unique approach and methodology. One such strategy is the support/resistance trading strategy. This strategy is based on the concept of supply and demand and is used by traders to predict potential price reversals in the market.
Understanding Support and Resistance
Before delving into the strategies, it is crucial to understand what support and resistance mean in trading.
Support
In trading terms, support refers to the price level at which a downward trend is expected to pause due to a concentration of demand. In other words, it is the level where buyers tend to enter the market in large numbers, creating upward pressure on prices.
Resistance
Resistance, on the other hand, is the price level at which an upward trend is expected to pause due to a concentration of supply. It is the level where sellers tend to enter the market in large numbers, creating downward pressure on prices.
Support/Resistance Trading Strategies
Traders use support and resistance levels to plan their entry and exit points in the market. Here are some of the most popular support/resistance trading strategies.
1. The Bounce
The bounce strategy involves buying or selling when the price touches the support or resistance level and bounces off it. Traders anticipate that the price will continue to move in the direction of the bounce and place their trades accordingly.
2. The Break
The break strategy is used when the price breaks through the support or resistance level. Traders expect that the price will continue to move in the direction of the break and place their trades accordingly. This strategy can be risky, as false breaks are common.
3. The Re-test
The re-test strategy involves waiting for the price to break through the support or resistance level, then waiting for it to come back and test the level again before placing a trade. This strategy can help to confirm the validity of the break and reduce the risk of a false break.
Conclusion
Support and resistance trading strategies are a fundamental part of technical analysis and are widely used by traders in all financial markets. These strategies can help traders to identify potential trading opportunities and manage their risk. However, like all trading strategies, they are not foolproof and should be used in conjunction with other technical and fundamental analysis tools.
