Support and Resistance: Tools Traders Must Know to Reduce Risks

Many people entering the trading world often try to develop complex strategies in various aspects but may overlook the most fundamental aspect: understanding Support and Resistance on price charts. This simple tool, if used correctly, can give you a significant advantage in trading.

Understanding Support and Resistance through Economics and Psychology

What is (Support)?

When we talk about support, we refer to a price level where buyers are eager to enter and buy. From an economic perspective, support occurs when selling pressure has been exhausted in the previous period until the price reaches a level where buyers become interested. At this point, the demand to buy and sell reaches equilibrium, causing the price to stop falling and reverse upward.

From a psychological perspective, support is like a mental boundary for traders. Those who bought earlier see the price dropping and are less hesitant to buy more, perceiving this point as a good value. Those who sold (Short) quickly buy back (Buy to Cover) to close their positions, and traders without positions see this as a good opportunity.

What is (Resistance)?

Similarly, resistance is a price level where many sellers are waiting to sell. Economically, resistance arises from strong buying activity reaching a certain price level where traders start to worry. Those who bought earlier tend to cut losses and sell, while those who sold (Short) are motivated to sell more (Short More) to take profit. New traders see this as a point to be cautious.

Both cases reflect that Support and Resistance are not just lines on a chart but points where market demand and supply undergo significant changes.

Practical Methods to Find Support and Resistance

###Trendline(: A simple yet effective tool

For beginners, drawing trendlines is a good starting point.

• In an uptrend: draw through higher lows )Higher Low( to create support, and through higher highs )Higher High( to create resistance.
• In a downtrend: draw through lower highs )Lower High( to create resistance, and through lower lows )Lower Low( to create support.

)Round Numbers###: Market psychology

Numbers ending with 0, such as 100, 50, 1000, have a strong psychological influence on traders. Price (with) just different by $99 but$100 traders perceive them very differently. These round numbers often become strong resistance levels.

$1 Moving Average###: The market’s average cost

The MA line represents the average price over a selected period, such as the 20-day MA, indicating the average cost that buyers have invested in over the past 20 days.

• In an uptrend: MA acts as support because prices tend to stay above this line.
• In a downtrend: MA acts as resistance because prices tend to stay below this line.

(Fibonacci Retracement): Natural mathematics

The sequence 0, 1, 1, 2, 3, 5, 8, 13, 21… appears in nature. When applied to price charts, it provides retracement levels that often follow these ratios. Key levels are 23.6%, 38.2%, 50%, 61.8%, and 78.6%.

Example: If a stock rises and then begins to retreat, the Fibonacci 50% level often serves as an important support.

###Price Gaps(: When the market jumps

Price gaps occur when the price jumps over a level without trading in between.

• Breakaway Gap: A gap accompanied by a strong trend change and high trading volume, often representing strong support/resistance.
• Runaway Gap: A gap within an ongoing trend, where the price often closes the gap later.
• Exhaustion Gap: A gap at the end of a trend, often indicating the trend is about to end.

Applying Support and Resistance in Real Trading

)Strategy 1: Range Trading$10

When the price moves back and forth between support and resistance without a clear trend.

Method: Buy at support, sell at resistance repeatedly, but be prepared for a breakout.

$20 Strategy 2: Reversal Trading$15

When the price hits support or resistance and shows signs of changing direction.

Method:

• In an uptrend, when the price hits resistance, sell ###Sell(.
• In a downtrend, when the price hits support, buy )Buy###.

(Strategy 3: Breakout Trading)

When the price breaks support or resistance with high volume.

Method:

• If resistance is broken upward: buy and look for a new support level from the previous resistance.
• If support is broken downward: sell and look for a new resistance level from the previous support.

Risks to Watch Out For

1. Don’t Fight the Trend(

Many traders see support but forget they are in a downtrend, leading to buying at support and getting stopped out as the price breaks support and falls. Conversely, those shorting in an uptrend may suffer heavy losses if caught off guard.

Protection: Trade in the direction of the trend. Use support and resistance to find good entry and exit points, not to fight the market.

) 2. Beware of Weak Support and Resistance(

Support and resistance levels tested multiple times tend to be strong, but over time, the trend may change.

Protection: Regularly check the duration. If support/resistance has been tested for months or years, reduce your trading size.

) 3. Watch Out for False Breakouts(

Prices often break support or resistance temporarily and then reverse. The key is to observe trading volume.

Protection: Genuine breakouts are accompanied by high volume. If volume is low and the price returns, it may be a trap. Always set appropriate stop-loss levels.

Summary

Support and resistance are fundamental yet powerful tools for traders of all levels. Whether using trendlines, moving averages, Fibonacci ratios, or price gaps, the key is practice and observation. Real market experience will give you a clearer picture than just reading. Most importantly, manage your risk and trade with the trend, not against it.