Support and Resistance Trading Strategy: Examples and Charts Analysis

Finding good opportunities in trading might involve understanding the concepts of support and resistance. These are like the building blocks of support and resistance trading strategies, and is a very popular approach for technically inclined traders.

Support and resistance are crucial concepts for many traders. They form the foundation of strategic trading. The main idea in trading is to identify favorable buying opportunities at support levels and advantageous selling opportunities at resistance levels. Support and resistance might help you achieve that, but it requires a lot of discretion.  

Let’s look at what it is and why it might serve as a useful heuristic in the complex markets:

What is support and resistance?

Support represents the point where the price of an asset is expected to halt its decline and potentially begin an upward movement.

Think of it like a floor that guides you on where to consider entering a long position when the price finds support.

On the flip side, resistance indicates the level which an asset’s price is expected to stop its ascent and potentially start declining.

Picture it as a ceiling that directs you on where to explore entering a short position when the price encounters resistance.

For example, the red line on the chart indicates resistance that requires time to break out of:

Resistance in trading example
Resistance in trading example

Here’s an example of support:

Support in trading example
Support in trading example

The market bottomed in October and this serves as a reference point when the market drops in January. It has become a reference point.

Market technicians say that support is stronger the more oversold the market is. And, as you can see, the market has pulled back a lot when the area around the blue line was hit.

Opposite, here is a chart showing resistance:

Support And Resistance Trading Strategy
Support And Resistance Trading Strategy

The numbers in the chart show that the market pulled back from the assumed resistance level that was formed via a top earlier. Note also that the market was pretty overbought when the resistance level was hit.

Resistance is areas where we can expect to find, on aggregate, many sellers.

Keeping an eye on these critical levels provides valuable insights into market trends and possible entry and exit points, but it’s not an exact science, to say the least. 

Support and resistance levels aren’t fixed; they can also shift based on market conditions.

Trendlines and moving averages, in fact, offer dynamic support and resistance levels that adjust with the market trend. 

Why do support and resistance work?

Support and resistance are some of the oldest and most used techniques in technical analysis. But does support and resistance work?

For whatever reason, support and resistance are lines in the sand for many market participants. Buyers rush in to buy at support in the anticipation that others will join. In behavioral finance, this is one of the most typical trading biases: anchoring.

Support and resistance might work because of the anchoring bias. The anchoring bias, also known as anchoring effect, is a cognitive bias that occurs when people give disproportionate weight to the first piece of information they receive when making decisions.

This initial information, or “anchor,” can be either relevant or irrelevant to the decision at hand, but it often unconsciously influences our judgments and choices. Thus, if a price has reversed at a certain price, traders “anchor” that price. 

The anchoring bias is one of the most consistent trading biases, and most of us use such a simple heuristic daily in everyday life. The anchoring bias can be a useful heuristic as long it has an evaluation of the risk and reward. 

This probably does not make any sense for a lot of people. However, in a very complex world, we need to use heuristics a lot to simple decisions.

Heuristics can best be described as “rule of thumb”. There could be a zillion reasons for why the market goes up or down, but in trading and investing we need to keep things simple.

No doubt the markets are very complex and involves an unlimited variables, but we have neither time nor interest in solving such an enormous puzzle.

Heuristics are a little similar to Daniel Kahneman’s System 1 thinking which he described in Thinking, Fast And Slow. System 1 is fast and intuitive thinking, while System 2 is slow, analytical, and rational thinking. Kahneman wrote:


System 1 operates automatically and quickly, with little or no effort and no sense of voluntary control.


System 2 allocates attention to the effortful mental activities that demand it, including complex computations. The operations of System 2 are often associated with the subjective experience of agency, choice and concentration.

We need simplicity in the marketplace:

There is an enormous amount of noise in the market and constant exposure to noise and information requires the use of simplicity. Anchoring, is such a very simple heuristic.

Let’s give you another example of anchoring:

Let’s assume you want to buy an apartment. The offering price is 100 000 and is immediately a reference point for the buyer. This amount might be far away from the real market value (higher).

Nevertheless, research shows that the buyer anyway somehow sticks to this price when he or she starts bargaining for a lower price.

The markets are more transparent today than before, so it’s not as easy to use anchoring for sellers, at least when it comes to things and assets that are very transparent and homogenous.

Heuristics work best when the risk of being wrong is low and when you have to make many decisions in short amounts of time. Trading is such one thing.

We can argue the risk of being wrong might be big, but that is up to your trading strategy to define. You need to evaluate risk and reward for your trading strategies.

Support and Resistance Trading

Understanding support and resistance can help you to identify potential price movements, but it’s not essential for success – far from it. It might serve as a useful heuristic when you need to make quick decisions. 

Unfortunately, both support and resistance are hard to quantify, thus making it harder for traders like us who are automated. 

What are Support and Resistance Levels in Trading?

As mentioned, support and resistance levels are price levels at which a stock or market can reverse its direction.

The support level represents the price level at which a stock or market tends to stop falling and may even bounce back.

On the other hand, the resistance level is the price level at which a stock or market tends to stop rising. These levels are vital in identifying potential entry and exit points for trades.

How to Identify Support and Resistance Levels?

Support and resistance has a lot of “art” in it. It’s often not an exact science, and thus makes it hard for quantified inclined traders (like we are).

Traders identify support and resistance levels by analyzing historical price data and looking for specific price levels where the price has repeatedly reversed its direction.

This could be seen as areas of accumulation (support) or distribution (resistance) as a result of supply and demand dynamics in the market.

How to Plot Support and Resistance Levels on a Trading Chart?

Traders typically plot support and resistance levels on a trading chart by identifying price levels where the price has reversed multiple times, just like we did in the chart further up in the article.

These levels are then connected to form lines that act as visual guides for traders to make strategic trading decisions.

Support and resistance involves drawing lines. This is, of course, not an exact science, and thus it’s hard to quantify. 

What is the Role of Support and Resistance in a Trading Range?

When a stock or market moves in a sideways direction within a defined price range, support and resistance levels determine the boundaries of this range.

Traders often look to buy near support and sell near resistance within this trading range, setting stop loss below support. 

How to Use Moving Averages in Relation to Support and Resistance Levels?

Moving averages can be used in conjunction with support and resistance levels to confirm potential breakout or reversal points.

For instance, if the price breaks above a resistance level and the moving average is also trending upward, it could signal a strong bullish signal. 

We recommend that you backtest. Backtesting a moving average is easy, but support and resistance complicates. 

How Do Support and Resistance Levels Help in Identifying Potential Trend Reversals?

Support and resistance levels often act as precursors to potential trend reversals.

When an established support level is broken, it may indicate a downtrend, whereas a breakout above a resistance level may signal an uptrend. Traders use these levels to gauge potential shifts in market sentiment.

What are Trendlines and How Do They Relate to Support and Resistance?

Trendlines are diagonal lines that connect important price points on a chart.

They often intersect with support and resistance levels, providing validation of these levels.

But again, trendlines are not an exact science, and we tend to see patterns in random sequences. The only way to find out if something really works is to use a scientific approach. 

How to Determine Support and Resistance Levels Using Price Action?

Price action analysis involves studying the raw price movements on a chart to identify potential support and resistance levels.

By analyzing candlestick patterns, chart patterns, and other price dynamics, traders can pinpoint key levels within the price chart.

For example, a doji might indicate a reversal near support, and a reversal after an extended move toward resistance. 

What are the Common Methods for Finding Support and Resistance Levels?

Traders employ various methods to find support and resistance levels, including horizontal price levels, pivot points, Fibonacci retracements, and using technical indicators such as moving averages, Bollinger Bands, and the Relative Strength Index (RSI) to identify these critical levels.

Still, we believe that price action is the most used method. 


Q: What is support and resistance in trading?

A: Support and resistance are key levels on a price chart where the price of an asset tends to pause, reverse, or experience increased volatility.

The support level is where price tends to find buying interest, while the resistance level is where price tends to encounter selling pressure.

We believe this tendency is related to the anchoring effect. Traders need simple strategies, and where prices have traded earlier make for easy accessible reference points. 

Q: What is the best way to trade support and resistance?

A: Most technical traders argue the best way to trade support and resistance is by identifying strong levels of support and resistance through technical analysis and using them to make trading decisions.

Traders can use various technical indicators and price action strategies to confirm these levels before entering or exiting trades.

However, we recommend a quantified approach. That requires some more time and commitment, but it gives you historical odds of the performance. 

Q: What is the best trading indicator for support and resistance?

A: There are several trading indicators that can be used for support and resistance trading, such as moving averages, Fibonacci retracement levels, pivot points, and Bollinger Bands.

The choice of the best indicator depends on the trader’s preference and the specific market conditions.

For example, a hypothesis might be: if the RSI is oversold and the price is close to support, what happens next?

Q: Are support and resistance real?

A: Yes, support and resistance levels are real and observable on price charts. These levels are based on the psychological behavior of market participants and their tendency to react at certain price levels, making them significant for technical analysis and trading strategies. We believe this is down to the anchoring effect.

However, we tend to see things we want to see, especially patterns. But most of the price action is completely random. This is why we recommend to backtest.  

Q: Can support become resistance?

A: Yes, in trading, a prior support level can become a resistance level once it is breached and the price revisits that level from the downside.

This phenomenon is known as “role reversal” and is commonly observed in technical analysis.

Q: Is support and resistance a good strategy?

A: It depends. Support and resistance can be a part of a good trading strategy, but it is essential that you have some indications of the odds of making money.

Most traders trade blind and have no clue if they have a positive trading edge or not. You need to backtest. 

Q: Is support and resistance profitable?

A: Trading based solely on support and resistance levels may not always be profitable. Again, we recommend you backtest. 

Q: What is the potential of support and resistance zones?

A: Support and resistance zones represent areas where price tends to react significantly. These zones can provide valuable insights for determining potential entry and exit points, as well as setting stop-loss and take-profit levels in a trading strategy.

Q: How does support or resistance level act in trading?

A: Support or resistance levels act as price barriers where traders observe potential buying or selling opportunities.

When price reaches these levels, traders analyze the market behavior to make informed decisions on whether to buy, sell, or hold their positions.

Q: Are support and resistance levels an exact science in trading?

A: The analysis of support and resistance levels far from an exact science and should be considered in the context of probability rather than certainty. 

It requires discretion in your trading decisions, and we believe this is very difficult for most traders. We believe most traders are better off doing some sort of quantified trading. 

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