What are Support and Resistance Levels in Spread Betting?

By mosesbet · Filed Under Spread Betting Comments Off on What are Support and Resistance Levels in Spread Betting? 

When you’re using technical analysis in spread betting one of the most important and easiest methods for trading is to find the support/resistance levels.

If you study a volatile stock such as the FTSE 100 you’ll notice that it can move up or down 100 or more points per day.  Today, for example, the FTSE 100 has a value of 5,357 (up 37 points since yesterday). This makes it very unpredictable and very unsuitable for new spread bettors to trade on.

However, one of the things that day traders and swing traders can do is find the support and resistance levels.  If you study markets on a daily basis than you’ll notice that they normally hit a “high” point and then fall back down again to a “low” point.  In the trader’s lexicon these are called the support and resistance levels.

Explaining How Support and Resistance Levels Work:

Understanding support and resistance levels is pretty easy to be honest.  Basically, a support level is when the price of an instrument falls to a point where there will be more buyers than sellers. This will lead to the stock bouncing back up again.

The resistance level is the high point a market will reach before there are more sellers than buyers. Once traders think a market has hit its peak price they will begin selling, causing the price to fall back down.  If you take a look at the current price of gold for example it tends to move around 30-40 points on a daily basis between $1,725 and $1,770.  It’ll usually hit a peak price of around $1,780 before falling back down again.  In other words, this would be the resistance level market for the gold spot price.

Identifying support and resistance levels isn’t that simple however since markets will tend to break through the resistance or support – if only for a matter of minutes, hours or days.

You can identify the strength of the support/resistance levels by seeing how many times the stock hits that levels and fails to break out.  For example, if the market for gold bullion hits $1,770 five times in a single week but fails to break past it then this is a strong resistance level.  However, if it does easily manage to break past the resistance several times then it’s a “weak” resistance level.

In the picture below, you can see that there is major resistance when the market tries to move past 1400 but minor resistance at 1220.

Overall, resistance and support levels are psychological values placed on individual stocks or markets.    Once an instrument reaches a certain point buyers and sellers will act accordingly based on whether they think the price will increase or decrease.  Usually standard patterns of markets emerge, and you can easily see support and resistance levels by studying candle stick, bar chart of line data.

Importantly, there are no exact values for support/resistance levels.  Some traders such as me also prefer to use the term “resistance zones” which is a more general statement about how markets behave and identifies the more general “area” for the support and resistance levels.

Tips for Trading on Support and Resistance Levels

Most basic day traders will analyse the support and resistance levels of markets in order to place a trade.

For example, when a market hits its historical support level than a trader will open a trade (with a trailing stop placed just below the support level) predicting that the market will bounce upwards.

When a market break-out occurs (i.e. market moves beyond its resistance level) then traders may also open a trade to go long and place a stop-loss just below the resistance.  For example, when US government announced the QE2 (quantitative easement) to print more money, the gold price jumped massively breaking traditional resistance levels and hitting record prices.

Alternatively, if you’re short selling you could do the opposite.  Once a market hits its resistance levels you could start selling and buy back once it sinks down to the support.

Just be careful that you don’t panic and sell stock too early when a market breaks below its support levels since it will often bounce back if you give it enough time.

How to Calculate Support and Resistance Levels

Traders use a number of technical indicators to find support and resistance levels however the most common methods are MAs, Exponential MAs (EMAs), Bollinger Bands and Fibonacci Retracement Levels.

All of these methods rely on historic market data (usually by analysing candle-stick charts) to find the support and resistance levels for markets.  The best method for finding resistance/support levels in my opinion is to use a variety of these indicators and technical tools.  The more tools you use to support your levels then the more reliable they will be.

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