Support and Resistance Trading Guide for Beginners

Support and Resistance Trading Guide for Beginners

Reading time: 6 minutes

Support and resistance levels are the backbone of technical analysis and are used in most trading systems. Even if your focus is predominantly on fundamental analysis, you will likely watch the charts and employ at least basic support and resistance levels for entry and exit points. 

Support and Resistance: The ‘Floors’ and ‘Ceilings’

Whether you're trading in the Forex market, the Stock market, the Bond market, or even the Cryptocurrency market, or whether you’re a day trader, swing trader or position trader, the concept of support and resistance remains the same. A support level acts as a temporary floor defended by buyers, while a resistance level acts as a ceiling coordinated by selling pressure. 

Support and resistance levels reflect past market behaviour, influencing future price action based on trader psychology. At support levels, previous buying interest suggests a potential buying opportunity (or a ‘long’ opportunity) as price retests the same support. Conversely, resistance levels might trigger selling from traders who recall prior struggles for the price to break through, opening things up for a possible selling opportunity if the same resistance is tested (‘short’ opportunity).

As shown on the daily chart of the EUR/USD currency pair below, an example of support can be found at $1.0722 (blue level). The initial point of possible support was determined in early December 2023, with subsequent tests of the level seen in January, February and again in March 2024.

Locating Support and Resistance Levels

How one defines a support and resistance level will differ from trader to trader. While objective methods of identifying support and resistance levels exist, like using round numbers (think $1.2500 on the EUR/USD currency pair, or $2,000 per troy ounce on gold), pivot point levels, moving averages or just simple swing highs and lows, taking the time to train one’s eye – often referred to as a ‘trader’s eye’ – to spot clean levels is recommended. 

Training one’s eye to single out workable support and resistance levels will take screen time. Like anything, practice makes perfect. Below is the daily chart for spot gold (XAU/USD). Take a few minutes to let your eyes adjust to the chart's ebb and flow, and try to identify obvious support and resistance levels. 

Below is the same chart with a clear support and resistance level applied. It is important to understand that once a support level is breached, it very often delivers resistance, and vice versa. You can see that this occurred in the example below. First, support was identified in April 2023. It was then engulfed in May and delivered resistance in the same month, as well as in July and again in October until it was breached in November and subsequently retested as support in December. Each of these noted tests can provide opportunities for a trade.

Support and Resistance Areas

It is common for beginner traders to attempt to pick a defined price level for support and resistance, similar to the examples above. This is impractical, as levels seldom hold to a precise value. As a result, many professional traders work with support and resistance zones. These zones also offer traders an area to help plot entry and stop-loss levels. 

Working with the same example in gold below, you can see that by swapping the defined price support and resistance level and replacing it with an area, the trader has more room to work and can enter short (long) at the underside (upper edge) of the resistance (support) zone and position stop-loss orders above (below) it.

Support and Resistance In line with the Trend

Like everything in trading and investing, it is recommended to build a case of evidence before committing to a trade. This could be a combination of fundamental and technical analysis and include things like economic indicators, trend studies, volume studies and additional price action analysis (think Fibonacci and trendlines, for example). 

One common approach is to only execute trades that are aligned with the underlying trend. The idea is to look for long trades at a support zone that line up with a market’s trend. The example above, the retest of support in December 2023 on gold’s daily chart, formed following a higher high, reaffirming the uptrend in the precious metal. Therefore, the retest of support was an opportunity to enter long. Some traders also look for additional confirmation through candlestick patterns and volume studies following the test of the support. 

The same principle applies to a market in a downtrend: following a lower low, a retest of resistance formed on a pullback can provide opportunities to short. 

Support and Resistance FAQs

1. What are support and resistance levels?

Support and resistance levels are temporary floors and ceilings of a market that are defended by buyers and sellers, respectively. 

2. Is there an easy way to identify support and resistance levels?

Support and resistance levels can be identified using objective methods, such as round numbers and utilising the pivot point indicator. These are levels that will be seen by all the market players. However, it is suggested that you take the time to learn how to recognise support and resistance on a chart.

3. Is it recommended to look for support and resistance areas as opposed to defined price levels?

Yes. Professional traders rarely view support and resistance as a defined price level; they are usually presented through an area.

4. Does a breached support become resistance?

Once support is removed, this area can form resistance, and vice versa. If resistance is breached, it can subsequently deliver support. 

5. Where can I learn more about support and resistance?

Consider visiting the FP Markets Trading Academy, a place designed for aspiring traders and investors. Here, you’ll find in-depth videos and articles ranging from beginner to advanced.

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