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Monday, June 6, 2011

Support


What is support?

Trading support is the topic of the post. What is support in technical analysis? I guess the answer to the question is not very complicated. It is a technical level where price came once from top downwards and was not able to fall any further. This becomes an important psychological level for most traders saw that the level held the price and next time the price comes to the level, most probably it will have a lot of buyers there. The more times the level is tested the more important and stronger it becomes. 

Multiple support levels

Very often a downtrend ends when a price of a security fails to break through some low which it tested many times. In this way a range is formed and after that an uptrend usually develops. So, if one is in a range trading support is essential for prices of securities visit the same levels again and again and those levels hold. I usually try to spot a divergence on RSI indicator, flattening Bollinger bands and 123 patterns on various time frames to define my entry points at various support levels. If support fails you should be ready to trade a breakout. 

Support in a trend

When securities are in a trend, support is also a very good strategy that one can implement in making decisions for a trade. If a market is in an uptrend you would often see peaks and valleys as the market progresses upwards. Some traders would enter another trade when a security makes new high. Others wait for pullbacks and buy back at previous resistance (which is now support) or wait for confirmations that a counter trend move is over and it is time to go up again. Various technical tools, some of which have been mentioned above are used to define when a counter trend move has finished. 

Wait for confirmations before trading support

I also like waiting for the price to hit the same level twice to find some short term bottom before I go up with a trend. The double bottom usually ends up with 123 pattern and strengthens the idea of a real reversal. In trading currencies I would wait for European session to start for currencies are usually consolidating during Asian sessions and forming bottoms during a short term counter trend move. During European sessions volatility goes up and market usually takes its trend oriented direction. This may very with other securities, but there usually is a tendency for a move in the direction of a trend to continue when a trading day starts. 

Check support on various time frames

If you want to see support and resistance levels clearly I would encourage you to put trend lines on the places where prices came and were rejected. This will give you a better perspective of where you can see support and resistance next. You should train yourself to do that on multiple time frames. It is better to start with monthly, weekly and daily charts, before you proceed to hourly and minute charts. Longer time frames give you a perspective on the big picture and smaller time frames give you clues on where to enter and exit the market. When you train your eye to spot support levels on longer time frames it will become much easier to do it on smaller time frames for the same basic principles are applied on all time frames. If you use only smaller time frame you might become a short sighted day trader, if you use only long term time frame you will miss a lot of opportunities that happen in financial markets on daily basis. So try to find balance between those time frames. 

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Disclaimer
Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.