How to find support and resistance level for perfect trading

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Learn Support and resistance level – A simple but effective guide

Most of you will have had some type of study in the idea of support and resistance, but you do not recognize the psychology behind it. There is a reason for “market memory”, which is the phenomenon that what was once important becomes important again. This is typically seen as a situation that allows traders that are in the wrong side of the trade to get out with little or no damage. What I mean by this is that if you have been shorting a market, and then it rallies significantly, it will quite often find support at that area that was previous resistance. However, do you understand why this is?

The attached chart is of the GBP/CHF pair, and you can clearly see that there is the 1.30 level marked on the chart as both support and resistance. We have recently broken out above that level, and then pulled back to test that area and see signs of support. The support is a byproduct of a couple of things going on at the same time. Initially, there were sellers there and now they find the market offering them an opportunity to get out of a bad position at essentially “breakeven.” They will take that opportunity, as they have been feeling a bit of pain as of late. By closing their short position, they are buying, and therefore adding bullish pressure.

Beyond that, there are people who have missed out on the breakout, and they know that those people or their willing to get out of the market with little or no damage. It is a huge sigh of relief for those people who had been short the pair, and now those who have missed the opportunity to take advantage of the breakout are willing to go long as well. In other words, the chart simply reflects psychology of trading participants. Keep this in mind when looking at potential trading opportunities.