TRADiNG Support, Resistance and POI
Trading support and resistance with points of interest. Most interpret S&R and POI differently therefore this video helps to explain how we determine each as part of our trading strategy.
*Support and resistance* are fundamental concepts in technical analysis, which is used by traders to make decisions in financial markets like stocks, forex, and commodities. These concepts help traders identify price levels where an asset's price tends to stop and reverse, providing potential entry and exit points.
1. *Support*
*Definition:* Support is a price level where a downtrend can be expected to pause due to a concentration of demand. As the price declines towards this level, buyers become more inclined to purchase the asset, believing it to be a good value.
*Behavior:* When the price approaches the support level, it typically "bounces" off this level and starts to move upwards. However, if the price breaks below the support level, it could indicate a continuation of the downtrend, with the support level turning into a new resistance level.
2. *Resistance*
*Definition:* Resistance is the opposite of support. It is a price level where a rising price tends to reverse or stall due to a concentration of selling pressure.
*Behavior:* As the price rises towards the resistance level, sellers may become more inclined to sell the asset, believing that the price is too high. If the price breaks above the resistance level, it can signal the start of a new uptrend, and this resistance may turn into a new support level.
3. *Types of Support and Resistance Levels*
*Horizontal Support and Resistance:* These are the simplest forms and are drawn as horizontal lines on a chart at levels where the price has historically shown support or resistance.
*Trendlines:* When support or resistance is not horizontal but rather sloping, they are referred to as trendlines. An upward-sloping trendline represents increasing support levels, while a downward-sloping trendline represents declining resistance levels.
*Moving Averages:* Traders also use moving averages as dynamic support and resistance levels. For example, the 50-day or 200-day moving averages are often used as key support or resistance levels.
*Psychological Levels:* Round numbers, such as 100, 1,000, or 10,000, often act as psychological support or resistance levels, as traders tend to place orders at these levels.
4. *How Traders Use Support and Resistance*
*Entry and Exit Points:* Traders often buy near support levels and sell near resistance levels, hoping to capitalize on the reversal in price.
*Stop Losses:* Traders place stop losses just below support levels (for buy positions) or above resistance levels (for sell positions) to manage risk.
*Breakouts:* When the price breaks through a support or resistance level, traders may enter a trade in the direction of the breakout, expecting a significant move in that direction.
5. *False Breakouts*
Sometimes, the price temporarily breaks through a support or resistance level but then reverses direction. This is known as a false breakout and can trap traders who enter too early.
6. *Identifying Support and Resistance*
*Historical Price Data:* The most reliable way to identify support and resistance levels is by looking at historical price data, identifying where prices have consistently reversed or stalled.
*Volume:* High trading volume at a particular level can reinforce the significance of that level as support or resistance.
7. *Combining with Other Indicators*
Traders often use support and resistance levels in conjunction with other technical indicators, such as the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD), to confirm potential trades.
8. *Limitations*
Support and resistance levels are not infallible and can be subjective. Different traders might draw these levels differently based on their interpretation of the charts.
The market can break through support and resistance levels, leading to unexpected price movements.
Understanding and applying support and resistance in trading requires practice and experience, as these levels are crucial in making informed trading decisions.
In trading, *Points of Interest (POI)* refer to specific levels or zones on a chart where significant trading activity is expected to occur. These points are often identified using various technical analysis tools and can signal potential opportunities for entering or exiting trades. POIs are crucial for traders who rely on price action and market structure, as they help in pinpointing key areas where price is likely to react.Trading Strategy for Busy Professionals: Mastering the 4-Hour Timeframe
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