Investing with support and resistance levels is a cornerstone of technical analysis

SmartReversals
04-19

Investing with support and resistance levels is a cornerstone of technical analysis and a vital practice for traders of all experience levels. Here's why it's so important:

1. Identifying Potential Turning Points: Support and resistance levels represent areas on a price chart where buying or selling pressure has historically been strong enough to halt and potentially reverse the current trend. Recognizing these levels helps you anticipate where price might change direction, offering strategic entry and exit points.

2. Defining Risk and Setting Stop Losses: These levels provide logical references to set stop-loss orders. If you enter a long position near a support level, a break below that level can signal that the bullish assumption was invalidated, making it a prudent place to limit potential losses. Conversely, resistance levels offer similar guidance for short positions. Why References? Because the levels can be touched and price may reverse, so setting stop losses below (for longs positions) or above (for shorts) is wise.

3. Establishing Profit Targets: Support and resistance zones can also serve as potential profit targets. If you buy near support, the next significant resistance level becomes a logical area to consider taking profits.

4. Understanding Market Sentiment and Psychology: The formation and reaction to support and resistance levels often reflect the collective psychology of market participants. A strong bounce off a support level can indicate renewed bullish sentiment, while a decisive break through resistance can signal the start of a new uptrend.

5. Improving Trade Timing: By identifying these key areas, you can improve the timing of your entries and exits, increasing the probability of successful trades and potentially maximizing profits. Entering a long position right at a confirmed support level offers a higher probability setup than entering randomly within a downtrend.

6. Providing Context to Other Indicators: Support and resistance levels can be used in conjunction with other technical indicators (as we do every weekend in the Trading Compass Edition) to create more robust trading strategies and confirm potential signals.

In essence, trading without considering support and resistance is like navigating without a map. These levels provide crucial context, help manage risk, and improve the overall effectiveness of your trading decisions. By understanding and utilizing these fundamental concepts, you can trade with greater confidence and increase your chances of success in the market.

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Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

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