✔️ Information reviewed and updated in December 2023 by Eduardo López
One of the most efficient ways to operate in the world of Trading is under the method of technical analysis. Within the technical analysis, One of the most used techniques is to operate with supports and resistances because when these break, we generally find buy / sell signals and excellent investment opportunities.
This is based on analyzing how much data we can, statistics and indicators to try to foresee the path that the asset will take and thus, carry out better operations. That is why here we will tell you what you should know about this mode of operation.
➡What are supports and resistances? ✨
We could say that the supports and resistances are lines that are formed using 3 support points in the graphs. Said 3 points of support or contact start from the minimums and maximums recorded as the asset prices rise and fall according to the market.
The breakdown of both supports and resistances implies that the asset exceeded these lines. In the case of a support breakout, this translates as a sell signal while, in the case of resistance, it translates as a buy signal.
➡Positions in a support and resistance breakout✨
It is very common to find breaks in the markets, in fact, there can be multiple breaks so learning how to use them is very important, since they are investment opportunities. Here we will tell you what are the ways in which you can take a position.
- At the break: To take a position right at the breakout, it must be clear because many times the size of the candle does not break with the minimum or maximum of the supports and resistances. If you will take this position, you should do so when the candle closes to avoid falling into false breakouts.
- Stop: Another way to do it is with a stop order, this means that you must place this order before the break with a level below support. The main advantage offered by this technique is to be able to take advantage of the start of trend movements.
- pull-back: This technique seeks to position itself in the movement that the price has when it falls below the break and then to recover again. To fix it, you must do it when the price begins to recover, which will allow you to optimize the entry in addition to helping to place a Stop.
➡Optimize your entry to a support / resistance breakout✨
- Open 2 positions: By opening two positions you will be taking advantage of the movement of the asset or instrument. Basically it is about opening a position at the breakout and another at another level, waiting for a Pullback to take advantage of it.
- Lower unit of time: Another option is to open a position in a lower unit of time, which implies being able to take advantage of the validation of a breakout in advance, as well as taking advantage of a change in Pullback. In this way, we optimize the entry price and, therefore, the results.
➡Signs of false breakups✨
A very common situation is the appearance of false breakouts which can result in bad positions and losses. Here we will tell you what each of these false breakouts consists of so that you take them into account and do not surprise you when it comes to trading.
- The wicks: It is very important to take into account the wicks of the Japanese candles, since they can tell us if it is a false signal or a break is coming.. The high and low wicks are good indicators of the high and low points, as well as the movement that the price of the asset will have.
- Two consecutive candles: One of the most effective ways to validate whether it is a true breakout or a false breakout is to wait for a second candle. This is because it is very common for the first to break the support or resistance, but the second no longer. Two consecutive candles are a clear sign that the trend will not reverse immediately.
- Periods of volatility: When there are periods of very high volatility, it is common for false signals to abound. That is why we recommend you to be attentive to market volatility to solve this situation.
- Volumes: Breaks tend to occur with higher transaction volumes, so it is very important to pay attention to their increase. If there is no increase in volumes, it is very likely that we are facing a false signal because without a good volume the change is not supported.
- Divergences: A divergence is another of the indicators to take into account since the appearance and degree of them can reveal whether we are facing a false or a real break. It is important to pay attention to whether divergences form despite the breakouts and the degree of them.
- Positions with clear breaks: The further you move away from the breakout, the more difficult it will be to place a position and a stop, so it is better to wait for a clear break to validate that it really is authentic.. So it is advisable to wait for the clear break to know that it is real.
➡4 signs it's a fake breakup
- Close of the following candle: One of the most recommended ways by experts to check if the breakout is false or not at the close of the next candle. If it closed above or below the breakout line, watch out.
- Candle color: If you see that the candle that proceeds to the breakout changes color, for example, the first was green and the second was red, this is a sign of doubt in the market. For a breakout to be real, the adjoining candle must be the same color.
- Large wick: Another indicator to take into account is the size of the candle wick, since short wicks are usually those that indicate continuity. So it is better to pay attention to the size of the wick.
- Small candle break: The small candles are a fairly effective indicator of whether the breakout is false, this because when the breakouts occur in small candles they are usually much weaker so they can be reversed. A solid breakout occurs in the much more robust and resistant candles.
➡How to place a Stop on a support / resistance breakout? ✨
- Depending on the market: One of the most efficient ways to set a Stop is based on prices and the market level. It is advisable to set it above the maximum / minimum or the resistance / support level to have room for maneuver.
- Calm: Being calm is very important, as many times we make the mistake of rushing forward without waiting for confirmation of the support / resistance breakout. Being calm will help us to validate the change and thus, to set a Stop that really helps us to generate more capital gains.
- Reduce risk: Moving the Stop to an optimal entry price can be a good way to reduce risk when trading. Learning techniques that help us minimize the risk of losses can be a good way to ensure that your operations will not lead toto ruin.