In technical analysis, we pay more attention to two aspects: one is the trend; the other is the support and resistance position. In the process of trading, we emphasize going with the trend. However, the market situation is not static, there will always be some fluctuations and reversals. So, at this time, what should we do?
In fact, this is the significance of our study of support and resistance levels. If investors can accurately grasp the support and resistance levels in the fluctuation of the market, then they can smoothly enter and exit the market at the correct point and make a profit.
In simple terms, the role of support and resistance levels is like traffic lights; they can prompt us when to accelerate? When to wait? And when to stop decisively?
Overall, analyzing support and resistance levels well can help investors improve their risk-reward ratios, enhance the accuracy of entry and exit points, and help investors avoid arbitrary and blind trading, thereby reducing unnecessary losses.
2. Common methods for determining support and resistance levels
Generally, in actual operations, the common analysis methods we encounter are the following three: they are moving averages, Bollinger Bands, and Fibonacci retracement levels. Below, we will evaluate these three common methods one by one.
1. Moving averages are frequently used in determining support and resistance levels. Moving averages serve two main purposes: one is to indicate direction; the other is to provide support and resistance.
Common moving averages can be divided into simple moving averages (SMA) and exponential moving averages (EMA). As for which moving average is better, it depends on personal preference; there is currently no unified opinion. Friends who prefer SMA tend to favor integer moving averages like 5, 10, 20, 50, 150, and 200. Friends who prefer EMA are more inclined towards moving averages based on the Fibonacci sequence, such as 21, 34, 55, 89, 144, and 233. In fact, the properties and values of moving averages are not the most important; it's still about finding what fits your personality.
It is worth noting that when using moving averages to analyze short-term support and resistance, it generally needs to comply with the principle of larger period small moving averages, smaller period large moving averages. For example, when looking at daily charts, the focus is usually on the 5-day, 10-day, and 20-day moving average resistances. If it is hourly or 15-minute charts, the focus is generally on the 100 and 200 period moving averages.
In addition, the author of the (Principles of Professional Speculation) has a special fondness for the 200-period moving average, especially its excellent applications on daily and fifteen-minute charts, and interested investors can also try this method.
2. Judging support and resistance levels through Bollinger Bands generally focuses on the upper band, middle band, and lower band.
Generally speaking, when the Bollinger Bands are flat, the changes are small, and the support and resistance levels are relatively stable, which is also the best time for high selling and low buying operations. However, investors should also be cautious that when the Bollinger Bands are flat, we must set stop-loss levels to prevent breakout occurrences. Mr. Bojin's experience is that when using the Bollinger Bands for judgment, it is best to choose a larger period, such as a 55-period or even a 100-period Bollinger Band.
3. Fibonacci retracement levels are the most common and effective way to find support and resistance levels. Mr. Bojin suggests that everyone pay more attention to the use of this method, especially the important Fibonacci levels of 38.2%, 61.8%, and 50%.
