Practical Application of Support and Resistance Lines in Trading: A Complete Guide from Identification to Decision-Making

The Nature of Support and Resistance: The Battle of Market Forces

In any market price fluctuations, there are always two opposing forces at play. One is the defense line protecting the price from falling, which we call support; the other is the ceiling preventing the price from rising, which we call resistance. Essentially, support and resistance reflect the strength comparison between buyers and sellers at different price levels.

Traders pay attention to support and resistance because these levels often become key decision points. When the price approaches these areas, market participants make predictions based on historical performance, forming self-fulfilling prophecies—buying interest gathers near support levels, while selling pressure emerges near resistance levels.

How to accurately identify support and resistance levels?

On candlestick charts, the locations of support and resistance are not arbitrary:

Features of support levels: The price repeatedly stops falling and bounces near a certain price, forming a series of lows. Connecting these lows creates a support line. The more times this line is tested without being broken, the stronger its defense.

Features of resistance levels: The price repeatedly encounters resistance and pulls back near a certain price, forming multiple highs. Connecting these highs yields a resistance line. The more times this line is tested without being broken, the more significant its resistance.

The golden rule for drawing support and resistance lines is: at least two confirmation points are needed to draw an effective support or resistance line. One point may be coincidental; two points establish a trend. Three or more touches indicate strong market consensus on that level.

Dynamic Conversion Mechanism of Support and Resistance

Support and resistance are not fixed. As price movements develop, they can switch roles, which is where trading opportunities arise.

Role reversal after support break

When the price breaks below an existing support level, market psychology undergoes a dramatic change. Traders who believed the price would rebound at this level face losses and are forced to cut losses, further accelerating the decline. At this point, the original support level turns into a new resistance level—because every time the price bounces back to this level, previous long positions rush to exit, and new sell orders anticipate a return to that level.

Real-world example: Gold prices in a choppy market, with support at around $1912. After this level is effectively broken, gold prices drop sharply, and subsequent rebounds are resisted near $1912. This former support level completely turns into a resistance level.

Role reversal after resistance break

The reverse logic also applies. When the price breaks above a resistance level, traders who expected a decline are forced to close short positions and switch to long, leading to continuous buying. After the breakout, each time the price retraces to the breakout point, traders see it as a new support level—since this was the successful breakout point, they anticipate a rebound here.

For example, after the resistance at around $1970 in gold is broken, subsequent dips are supported near $1970, and gold continues to strengthen.

Confirmation Standards for Breakouts: Not All Crossings Are Breakouts

Many traders often make the mistake of mistaking brief touches for true breakouts. Genuine support and resistance breakouts require strict conditions.

Definition of a breakout: When support or resistance is effectively breached, making that level no longer relevant for technical analysis.

Confirmation conditions for a breakout:

1. Closing price breach is the only valid form. Intraday touches do not count; only when the closing price of the trading day is outside the support or resistance level can it be considered a true breakout. Typically, a close beyond 3% of the level is used as a standard.

2. Volume must support the move. Breakouts often require momentum. The volume after the breakout should significantly increase, preferably exceeding the 5-day average volume by more than 30%. This indicates that the breakout is driven by genuine market participation rather than false signals.

Breakouts without volume support are prone to being “false breakouts,” where prices quickly revert, leading to losses.

Practical Trading Strategies Using Support and Resistance

After understanding the principles of support and resistance, how can traders turn them into actionable signals?

Long (buy-side) operation logic

Long traders mainly rely on support lines:

• Optimal entry point: When the price retraces to near the support line and shows signs of rebound. At this point, risk is relatively controlled because the space below support is limited.

• Stop-loss placement: Below the support line. If the support is effectively broken (refer to breakout confirmation standards), the original trading logic is invalidated, and a decisive stop-loss should be executed.

• Profit target: Usually set near the resistance level above.

Short (sell-side) operation logic

Short traders focus on resistance lines:

• Optimal entry point: When the price rises to near the resistance line and shows signs of reversal. This reduces the risk of trend continuation against the position.

• Stop-loss placement: Above the resistance line. If the price breaks above resistance, the short thesis is invalidated, and stop-loss should be triggered immediately.

• Profit target: Typically aimed at the support level below.

Signal judgment from candlestick chart practical cases

Taking gold as an example for detailed analysis:

Sell signals from March to November 2022: Gold prices declined from a high of $2066. During the decline, levels at $1996, $1895, $1810, and $1725 formed clear resistance. Each rebound to these levels was resisted and turned down, indicating persistent bearish strength. Investors who bought at high levels should recognize the trend reversal when the price tests a level three times without breaking through, and exit accordingly.

Buy signals from November 2022 to June 2023: Gold bottomed at $1616 and rebounded. Each time the price retraced to around $1719 and $1805, it found support and continued upward. These three levels (1616, 1719, 1805) formed clear support lines, indicating an established uptrend. Traders should consider buying on dips near support levels.

Precautions When Using Support and Resistance Analysis

Support and resistance are among the most widely used technical analysis tools, but no single indicator is without limitations:

• Support and resistance are effective in both medium-long-term trends and short-term oscillations, but their validity increases with longer timeframes.

• In ranging markets, support and resistance are most valuable; in trending markets, the significance of breakouts and role reversals is more prominent.

• Never rely solely on one indicator for trading decisions. Combine 2-3 other technical tools, such as moving averages, RSI, etc., for cross-verification before acting.

• Drawing support and resistance lines involves subjectivity; different traders may draw slightly different lines. Therefore, these levels should be used as references, not absolute signals.