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How to place a trade using support and resistance? Support and resistance is one of the most beautiful concepts in trading. If you have been trading for a while you might have been receiving daily alerts that give you the daily and weekly support and resistance levels.
So, what is support and resistance. Support is the zone where buyers start buying in the large number thinking the price to be a good buy. When large number of buyers enter the market around the same price level, price rebounds from that level and starts rising. So why buyers enter at that price level?
There are many reasons but the most important reason is that the big players in the market like the banks, big corporations, hedge funds and institutional investors who have large buy orders to place don’t do so at once. They wait for a certain price target that they think to be a good buy. So, this price target appears as a sort of support in the market.
Support is just like the floor of a room. Just like when you hit a ball on the floor, it rebounds and returns to you, in the same manner, support is the level when the price action reaches that level, it rebounds and starts rising again. In the same manner, resistance is the price zone where sellers think that prices are too high and it is time to take profit and exit the market.
Think of Resistance as a ceiling of a room. When you throw a ball up, it will hit the ceiling and return back to you. In the same manner, when price action reaches the resistance, it rebounds and starts falling. Now, how to place a trade using support and resistance.
You can use an oscillator like the MACD or stochastic to identify the overbought or oversold conditions in the market. Overbought is the resistance and oversold is the support. Now, when the price action reaches the support, wait for a candlestick pattern like the doji that tells of a turning in the market. Once, you spot a trend reversal pattern in the market, enter into a long trade.
Now, when the price action will reach the resistance, the MACD or the Stochastic will show an overbought condition in the market, wait for a candlestick pattern like the doji again to enter into a short trade. By using a candlestick pattern, you are confirming that the market is infact making a turn. Good Luck!