Here, two key levels are marked on the chart. Unlike trend lines, support and resistance levels are always drawn horizontally, with support located below the price and resistance positioned above it.
To identify these levels yourself, you need to find price areas where movement repeatedly slows down or reverses, indicating that the market regularly reacts at those points.
In this example, the resistance level forms the upper boundary of the price channel, while the support level defines the lower boundary.
It’s important to note that this description applies to an upward trend. In a downward trend, the roles are reversed, with resistance acting as the lower boundary and support forming the upper boundary.
When price breaks decisively through either support or resistance, it is often seen as a strong signal that the market may continue moving in the direction of the breakout.
In some cases, clear and precise support or resistance levels cannot be identified. When this happens, it is more practical to define broader support and resistance zones rather than exact lines.
On the CG Invest trading platforms, these areas can be drawn using either the candle bodies or the wicks, depending on where price reactions occur most frequently.
How can support and resistance levels be applied in practice?
When analysing a chart, areas such as (a), (b), and (c) can often present favourable opportunities for opening buy positions, as price is reacting near support. Likewise, points like (d), (e), and (f) may offer suitable conditions for sell trades, as price approaches or reacts to resistance.
That said, support and resistance on their own are not sufficient to make trading decisions. These levels should always be confirmed with additional technical indicators and analysis, which will be covered in the following lessons.
It’s important to remember that support and resistance levels can change roles over time, depending on whether price moves higher or lower.
In the example shown, the price tested the resistance level twice at points 1 and 2. Once the price broke above the range, that former resistance turned into a support level, which was later confirmed at points 3 and 4.
How can you tell whether price is only testing a support or resistance level, or whether it is likely to break through and continue moving further?
A common rule is that the more times price reaches a level and reverses from it, the stronger that support or resistance area becomes, and the more difficult it is for price to break through. For this reason, many traders avoid opening positions in the middle of a range, where price is trading between support and resistance, as the next move can be uncertain and harder to predict.
When using support and resistance levels, the most favourable time to enter a trade is after price begins moving away from one level toward the other. A position is typically opened once the first new candle forms inside the range after bouncing from the level.
In this approach, it is often advisable to close the trade before price reaches the opposite level, as there is no guarantee that the market will actually touch it before reversing again.
If the price moves below a support level, it is best to wait for one or two candles to form in order to confirm that the breakout is genuine. Once confirmation is visible, a trade can be considered in the direction of the move.
In this situation, the former support level usually turns into a resistance level.
These explanations are provided for educational purposes only and should not be treated as direct trading instructions.
Where is the most appropriate place to set a Stop Loss?
For example, if a trade is opened 5 pips above a support level, it is logical to place the Stop Loss at a similar distance on the opposite side of that level, just below it. This approach helps protect the position if the price breaks through the support instead of reversing as expected.
In the same way, if the price breaks above a resistance level, a trade can be opened slightly above it, for example 5 points higher. In this case, the Stop Loss would be placed below the former resistance level to protect the position if the breakout fails.
