Understanding Support and Resistance (SR) Levels:
Support and Resistance (SR) levels are fundamental concepts in technical analysis, essential for traders and investors. These levels help identify crucial price zones where trends might reverse, continue, or pause. Support (S) and Resistance (R) levels help us identify areas big decisions might be made in the market.
In trading it’s important to be realistic about things that you can and can’t expect to be able to do well on an ongoing basis. Forecasting the direction of the market is something that is not realistically attainable to most people. Seeing where the big decisions are likely to be made, is attainable.
While nothing is infallible, there are methods that can be very reliable for working out areas a big decision can be made in the market. Although we can not know what will happen at these levels, we can know these are levels where we have the best chance of structuring good bets on the market.
In theory, if you only ever buy at support (Where there’s a higher chance it goes up) and only ever short at resistance (Where there’s a higher chance it goes down) you’d be expected to do better than average. Conversely, if you always buy at resistance and short at support you’re probably going to lose overall (Both in theory and in practice).
Making Our Big Decisions Before the Market Moves
Most people will intuitively make bad decisions about the market in real time. Those who make good decisions usually do so because they’ve made that many bad decisions that they know to bet against their innate feelings. Reading the market is real time is very, very hard. It’s hard on a practical level and harder on an emotional basis.
Trading is made much easier when we make our important decisions before the market moves. By the very nature of how prices tend to move you’re so much better off having planned levels of action than watching the action of the market and trying to decide where it will go next.
Markets usually move deceptively strong into highs and lows. If you do not know there is SR at these levels, you can be easily tricked by price moves into buying highs and selling lows. Most money is made and lost in markets on the price levels where the prepared traders meet the impulsive.
Having good SR levels planned out is a critical step to being one of the prepared.
Inflection Point: A Major SR Level
Our supports and resistance levels guides will be broken down into nine levels. Four of them are supports, four of them are resistance levels and one of them is an inflection point. The inflection point is just another SR level but it’s the one we think the first major decision on direction is likely to be made.
Using SR Levels for Trading:
1. Setting Targets:
- Traders often use resistance levels as profit-taking targets in bullish trades and support levels as targets in bearish trades. These levels provide a framework for setting realistic expectations for price movements.
2. Placing Stops:
- To manage risk, traders place stop-loss orders just below support levels in long positions and just above resistance levels in short positions. This helps limit potential losses if the market moves against their positions.
3. Trading Reversals:
- When price approaches a support or resistance level and shows signs of reversal, traders may enter counter-trend positions, anticipating a bounce or pullback from these levels.
4. Trading Breakouts and Retests:
- Breakout traders look for price movements beyond significant SR levels, indicating potential strong momentum. Retest traders wait for price to revisit these levels after a breakout, seeking confirmation before entering trades.
How SR Levels Are Presented
SR levels will be presented as 9 levels. Four above current price (Resistances), 4 below (Supports) and one which may be above or below current price which is the near term inflection point. See an example of SPX monthly chart levels below.