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The Use Case of Support and Resistance Levels

When it comes to the gold market, identifying the key support and resistance levels becomes crucial for trading strategies involving candlestick patterns. When candlestick patterns are utilized simultaneously with the major support and resistance levels, they form a powerful toolset, aiding traders in correctly identifying market trends and anticipating upcoming price movements and potential reversals.

This lesson will focus on the use case of support and resistance levels and how they can be implemented in conjunction with well-known bullish and bearish candlestick patterns to enhance trading strategies and determine optimized trading entries. Stay with us!


Understanding Support and Resistance Levels

Support and resistance levels are the most essential concepts utilized in technical analysis. These key price levels indicate the state between the forces of supply and demand in the market. Generally, the dynamic forces of supply and demand are the main reason behind each price movement.

When demand dominates supply, it could lead to a price appreciation. Conversely, when supply exceeds demand, a price decline occurs. Nevertheless, when there is an equilibrium state between the forces of supply and demand, the price will likely move sideways, indicating a consolidation/range stage in the market.

Support levels demonstrate prevailing demand in the market, where the buying pressure is more aggressive than the selling pressure, holding the price from further declines.

On the other hand, resistance levels indicate the dominance of supply, where the selling pressure is high and overwhelms the buying pressure, halting upward price movements. 


Importance of Support and Resistance Levels in Trading

Determining the key support and resistance levels should be among the initial steps of any trading strategy. These price levels aid traders in identifying possible entry and exit levels, anticipating the potential reversal points, and can be used as a confirmation for other price action patterns and technical indicators.

Therefore, by defining the major support and resistance levels before making trading decisions, traders can gain insight into the upcoming price direction and validate other signals indicating their entry level.

Always remember that support and resistance aren’t actually an exact price level but also indicate a price region/range serving support or resistance to the price.


Utilizing Support and Resistance Levels with Candlestick Patterns

So far in this course, we have learned about the well-known candlestick and chart patterns. However, the question remains is it possible to trade Gold just using the signals these patterns provide? Or is it advisable to enter a long position on Gold whenever you identify a bullish candlestick pattern on the chart?

The answer is no! Successful trading in the Gold market requires developing a trading strategy that involves implementing different tools, patterns, signals, indicators, etc. Traders should merge these signals and finally decide whether to buy or sell the asset and determine the possible entry level for the trade.

In other words, it is not advisable to enter a position each time you identify a bullish or bearish candlestick pattern in the chart without considering other potential factors. This is where the support and resistance levels come into play.

Traders should utilize candlestick patterns with key support and resistance levels to gain valuable insights into market dynamics and potential price moves and reversals. Traders can identify potential breakouts, trend reversals, and areas of consolidation by observing the interaction between candlestick patterns and these key levels.

Ultimately, it is noteworthy that the significant support and resistance levels can also be used as a confirmation sign for the bullish and bearish signals candlestick patterns indicate.


Tips for Effective Implementation

As mentioned earlier, traders should first identify the key support and resistance levels. Here are some tips to maximize the effectiveness of support and resistance levels and identify the important ones.
  • Always remember to use multiple timeframe analyses to confirm the validity of support and resistance levels.
  • A critical support and resistance level can be identified based on the number of times they have been tested. The more they are tested, the more effective they are.
  • Use support and resistance levels alongside other technical indicators and oscillators to gain additional confirmation signals on their strength.
  • Regularly review and adjust support and resistance levels as market conditions change.

Trading Strategies Based on Support and Resistance Levels and Candlestick Patterns

By combining the crucial support and resistance levels with the major candlestick patterns, traders can develop several trading strategies, including trend-following, breakout trading, reversal trading, etc. These strategies aim to capitalize on price movements that align with the identified support and resistance levels and candlestick patterns.

Case Studies

Let’s study a few examples to demonstrate the practical use of support and resistance levels when trading the candlestick patterns. We will examine specific market scenarios and explain how these crucial levels, combined with candlestick patterns, can aid traders in making better trading decisions.

Example 1

Let's say you recognize that Gold has been consolidating within a static price range, fluctuating between the support region of $1700 and the resistance zone of $1900, for several weeks.

After thorough analysis, you notice a bullish engulfing candlestick pattern has been formed around the $1900 resistance region on the weekly timeframe. Generally, this pattern suggests a potential bullish move.

You could place a buy order slightly above the engulfing candle to catch this opportunity, as the price action indicates a potential breakout from the resistance region. Accordingly, if the price breaks above the resistance region and confirms the breakout, it will likely lead to a significant upward move.


Example 2

Imagine that Gold’s price has been experiencing a downward trend for a few months, arriving at a significant support region that has been holding the price for an extended period. Meanwhile, you notice a hammer candlestick pattern forming near this crucial support region on the weekly timeframe. Remember that the hammer pattern is identified by a small body and a long lower wick, indicating a potential bullish reversal.

Hence, you might consider entering a long position if the price surpasses the high of the hammer candlestick, as the long wick suggests that buyers are stepping into the market, potentially resulting in a bullish trend reversal. In this case, to protect against a false reversal, you may set a stop-loss order below the hammer candlestick’s low or the support region.


Example 3

Suppose you have done a complete analysis on Gold and realize that its price has been in an uptrend, approaching the critical resistance of $1900. On the other hand, you identify a "doji" candlestick pattern forming at this crucial price region. A Doji has a small body, indicating indecision between buyers and sellers.

In this scenario, the Doji candlestick, formed near a major resistance region, provides valuable information. If the following candlestick confirms the resistance by closing below the Doji, it suggests that selling pressure is still present, and the price may experience a pullback or rejection.

This development potentially confirms the resistance region and could be an opportunity to exit a long position or a validation for opening a short position.

These examples demonstrate how support and resistance levels, in combination with candlestick patterns, can assist traders in identifying potential trade setups and making informed decisions. However, it is highly recommended to sign up on ITB Demo or Nano account to effectively practice support and resistance level.


The Bottom Line

Support and resistance levels, when used alongside candlestick patterns, offer traders a comprehensive understanding of market dynamics. By effectively identifying and utilizing these crucial levels, traders can find better trading setups and enhance their overall success rate.

To conclude, gaining a thorough understanding of support and resistance levels, and implementing them when trading the candlestick patterns, can significantly improve a trader's trading strategy and overall results.
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