Support and Resistance

How to Use Support and Resistance to

Limit Trading Losses and Identify
Breakouts
Table Of Contents
Introduction
Chapter 1 – What Is Support and Resistance?
Chapter 2 – Understanding Support and Resistance
Chapter 3 – Trending Support and Resistance Levels
Chapter 4 – The Strength of Support and Resistance
Chapter 5 – Using Support and Resistance to Cut Trading Losses
Chapter 6 – Using Support and Resistance to Place Stops and Take Profit
Levels
Chapter 7 – Warnings
Chapter 8 – Tips
Chapter 9 – Final Notes
Conclusion
Introduction
I want to thank you very much and congratulate you for downloading the
book, Support and Resistance—How to Use Support and Resistance to Limit
Trading Losses and Identify Breakouts.
In this book, you’ll discover support and resistance which is one of the single
most powerful indicators available to traders. You’ll learn what support and
resistance is, exactly how it works, and—step-by-step—how to use it to
identify key breakouts and limit your trading losses.
Plus, you’ll learn about the common pitfalls (and how to avoid them!), and
you’ll get numerous tips, techniques and strategies for placing your stops,
identifying potential trades, and much more using support and resistance.
Thanks again for downloading this book, I hope you enjoy it!
Legal
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Chapter 1 - What Is Support and Resistance?
Support and resistance are some of the most used indicators in technical
analysis. It is hard to imagine a trader who has never used these two critical
price levels in coming up with a trading strategy. But what is support and
resistance?
Definitions
The support level is the price point at which demand is believed to be strong
enough to prevent the price from falling further below. The logic behind
support level insinuates that when the price falls towards the support level,
buyers become more inclined to buy than the sellers are inclined to sell as the
underlying asset becomes cheaper.
On the other hand, the resistance level is the exact opposite of the support
level. This level is identified when a certain price point seems to be strong
enough to prevent the price from rising further. The logic behind the
resistance level dictates that when price rises towards the resistance level,
sellers become more inclined to sell as the underlying asset becomes more
expensive while buyers are less inclined to buy.
Chapter 2 - Understanding Support and Resistance

In general, support and resistance is arguably one of the most straightforward

trading strategies in technical analysis. However, for professional traders,
support and resistance levels can be extremely complex in the manner in
which they apply them in technical analysis.

For professional
traders, support and resistance are not just a matter of looking at a point
where the price of an underlying security seems to make a u-turn repeatedly
for a certain period.

GBP/USD False Breakout and Support & Resistance Zones

Simply put, support levels are usually below the current price while
resistance levels are usually above the price. Nonetheless, sometimes this rule
could be breached shortly in what technical analysts refer to as false breaks.
As illustrated in the figure above, the GBP/USD currency pair, popularly
known as Cable had a false breakout between Feb 28, of 2014, and March 3,
as the price went above 1.67075, the currency pair’s resistance zone.
This brings up another term in support and resistance levels. Now, in most
cases, it is impossible to identify one single point that the price of the
underlying security tends to make a u-turn once reached. In these cases, the
use of support and resistance zones comes to play.
These are the points where the price of the underlying security is expected to
make a u-turn before making a false break, or a significant
breakout/breakdown. The size of this zone in pips ranges depending the
period and time between candlesticks.
When the price of the underlying security breaks the resistance level/zone, it
is called a breakout while when the price falls below the support level/zone
technical analysts call it a breakdown.
Chapter 3 - Trending Support and Resistance Levels

In most cases, prices of underlying securities do not move sideways. They

rather assume a trending rally or decline with numerous bounces and deeps.

This also creates

what analysts call multilevel support and resistance. In an upward trend, a
multi-level support and resistance is created when a previous resistance level
becomes the new support. When this continues for a series of trading periods,
the price of the security being traded assumes an upward trend, in which case,
a technical analyst is able to identify and plot an upward trend line.

GBP/USD Trending Support and Resistance

As illustrated above, it is possible to identify a trending support and
resistance in a currency pair. In this case, the GBP/USD exchange rate
assumed a downward trend before breaking out with an upward trend, and in
the process, it created several multilevel support and resistance levels.
Chapter 4 - The Strength of Support and Resistance
The strength of support/resistance is determined by the number of times the
price bounces off the support level, or falls off the resistance. The price point
at which the price of the security tends to bounce off several times (the
support level) is referred to as the floor while resistance is known by
economists as the ceiling.
Now, the higher the number of times the price falls off the resistance level or
bounces off the support level, the stronger the particular price point becomes.
Buyers become attached to a certain support level when the price of the
security bounces off it several times. On the other hand, sellers become
attached to a certain resistance level when the price of a security falls off it on
several occasions.

However, other
technical analysts also believe that when the price of a security bounces off
the support several times, this could be signaling a substantial breakdown in
the near-term horizon. The same analogy is applied on the resistance level.
When the price of a security falls off a resistance level on several occasions,
this could be signaling a near-term breakout.

EUR/USD Support/Resistance Strength

The EUR/USD currency pair endured a reasonable period oscillating between
the support and resistance levels as illustrated in this figure. It bounced off
the support level on about three occasions before finally breaking
downwards.
The strength of support and resistance level is crucial to technical analysts
when it comes to making investment decisions. When the price of a security
tests its support level on a number of occasions, this signifies a potential
selling point as the security threatens to break the support level.
On the other hand, when the price of a security falls off its resistance level
repeatedly on several occasions this signifies a potential buying opportunity.
This also prepares the security’s price for some role reversal, as the old
resistance level becomes the new support.
Chapter 5 - Using Support and Resistance to Cut
Trading Losses
The importance of support and resistance is not limited to the identification of
key breakout/breakdown points. This valuable technical indicator can also be
used in trading actively. In fact, most professional traders have used support
and resistance to cut trading losses to a great effect on their trading balances
while at the same time capitalizing on potential profit taking opportunities.
Example
Traders, especially the ones who do not prefer using a percentage of
prevailing market prices to set up their loss limits, have largely used support
and resistance in setting stop loss limits. This has paid up handsomely in
terms of cutting trading losses in several ways.
First, when you are not online, stop loss limits work to a great advantage by
closing the position before a downward trend extends your loss in open
trades.
Now, as noted in the beginning, some traders prefer using a percentage of the
prevailing market prices, or a certain amount of loss they are willing to take.
For instant, traders can set a maximum loss of 20 pips, or 10% of the value
committed to a certain trade.
However, this practice could end up raking in unnecessary losses as
compared to when a trader uses support and resistance levels to determine
stop-loss points and profit taking opportunities.

Below is an
illustration, which supports using the support level to determine stop-loss.
The illustration above assumes a trader who uses pips to place a stop loss and
take profit limits. In this case, the trader used 230 pips to identify the
preferred stop loss and take profit points after opening a long trade for
EUR/USD currency pair at 1.3620. The trader then placed a stop loss at
1.3390 and a take profit level at 1.3850.
Now, as illustrated in the chart, the EUR/USD currency exchange rate
activated the trader’s stop loss on Nov. 8, three weeks after opening the long
trade. However, two days later the EUR/USD exchange rate rallied back to
resume the upward trend that the trader may have hoped to capitalize on.
Now, having activated the stop loss limit, the trader lost 230 pips.
Chapter 6 - Using Support and Resistance to Place
Stops and Take Profit Levels
First, the analogy behind using support and resistance level to place stop/take
profit limits dictates that, in most cases, the price of the underlying security
will oscillate between the support and resistance levels. This means that
placing a stop loss above the support level could trigger a pre-mature closure
of an open long position.
Most professional traders consider placing their stop loss limits slightly
below the support level. This ensures that traders do not take up unnecessary
losses due to a premature change in trend.
As noted at an early stage in this guide, when the price of a security
approaches the support level, in most cases a u-turn follows as it bounces off
owing to buying pressure. Buyers become more inclined to buying the
security when its current price approaches the support level while sellers
become less inclined to sell.
This means that placing the stop loss limit around the support level helps a
trader avoid taking several unnecessary losses.
As demonstrated in the chart above, if the trader places the stop loss at
around the support level, his losing open trade is likely to recover in the
coming days and assume an upward trend that could lead to bigger profits.
In this case, the open trade would have closed on Dec 27, after slightly
breaching the prevailing resistance level, thereby giving the trader immense
profits.
The same case applies when applying a take profit limit. Placing the take
profit limit around the resistance level could help a trader garner more profits
as compared to placing it below the resistance level.
When the take profit limit is placed below the resistance level, this could
prematurely activate it, thereby denying the trader the opportunity to rake in
more profits. The loss associated with this activity is referred to as trading
opportunity loss.
The FTSE 100 illustration of the opportunity loss in “take profit limit”
placement
As illustrated in the figure above, the hypothetical trader demonstrated here,
opened a long position on the FTSE 100 at 6,570 points, set a stop, and take
profit limits of 30 pips away from the buying price. The take profit limit
activated on the next candlestick at 6,600 points, thereby bagging the trader
some 30 pips in profits.
However, the figure indicates that the prices continued with the rally for the
following few days until a point where they came within the resistance level,
which consequently triggered a u-turn at 6,640 points. This means that the
trader incurred an opportunity loss of 40 pips because if used the resistance
level to come up with the take profit limit, he would have garnered in 40 pips
more.
Chapter 7 - Warnings
While using support and resistance can help traders take full advantage of the
profit potential, sometimes this strategy can also work against them.
If the price fails to reach the resistance level and falls back to a point such
that it creates a false breakdown, then this could end up triggering a loss,
rather than a small profit that the trader would have gained if he set a take
profit level below the resistance level.
From the support level point of view, a trader can limit the amount of loss by
setting a stop loss above the support level. This means that the stop loss is
triggered at an early stage before the loss becomes too much.
Chapter 8 - Tips
As noted earlier in this write-up, the importance of support and resistance
levels is to identify key buying and selling opportunities. This means that
they provide a useful guidance to traders in making investment decisions,
which include placing stop loss and take profit limits.
Historically, security prices have shown that, support and resistance levels
are key barriers for price movements. Therefore, these two will always be
crucial levels when it comes to determining the maximum loss a trader is
willing to take (by setting stop loss slightly below the support level), and the
optimal profits (by setting take profit slightly above the resistance level).
When a breakout or a breakdown happens, in most cases this is usually
driven by some external factors, other than buying and selling pressure.
These factors include macro-economic events and company events (stocks).
Therefore, it is always advisable to watch out for upcoming events relevant to
your open positions or the position you are about to take in a certain currency
pair, stock or commodity.
Based on a trader’s experience and risk appetite, margin trading is only
advisable for those in a position to risk every penny they put in their trading
account. That is what genuine brokers will tell you. However, if a trader feels
that he seriously needs to do margin trading, then it is advisable to start with
the lowest ratio possible.
Margin trading can easily lead to emotional trading, which is highly
discouraged.
Support and resistance levels can help traders in combating emotional trading
by limiting losses and restricting them to the amount of profits they can make
per trade. If a trader maintains his trading activity within the support and
resistance levels, then emotional trading would be limited as this entails
discipline.
Chapter 9 - Final Notes
Support and resistance levels provide pivotal beginning points for traders in
evaluating a certain security before deciding to take a long or short position.
These two levels provide the basis on determining the optimal stop loss and
take profit levels, by ensuring that the trader takes full advantage of the
profits prior to reaching the resistance level, and at the same time avoiding
unnecessary losses caused by closing positions prematurely.
Support and resistance levels can also be used alongside other indicators like
the Bollinger bands, simple moving averages SMAs and Fractals among
others. Using a combination of two or more of these indicators is useful in
refining the direction of a trade.
Conclusion
Thank you again for downloading this book!
You should now have the knowledge you need to use support and resistance
to identify key breakouts and cut your trading losses.
The next step is to take action!
Finally, if you enjoyed this book, please take the time to share your thoughts
and post a review on Amazon. It’d be greatly appreciated!
Thank you and good luck!

Bonus: Download the Free Trading Toolkit

Get instant access to free cheatsheets, workbooks and guides to help you
become a profitable trader or investor.
As a special thanks for downloading this book, we've put together a toolkit of
exclusive resources, including…
- Our exclusive ebook: How to Protect Your Trading Profits
- Downloadable cheatsheets for proven option trading strategies
- Our step-by-step guide for using a demo trading account to
maximize your profits
- Plus, brand-new ebooks, downloads, workbooks, cheatsheets,
videos and more each month
Click to Download the Free Trading Toolkit
or visit: www.zantrio.com/kindle