One of the most important skills that you should develop as a trader is how to identify support/resistance levels. By becoming equipped with this skill, you’ll learn how to understand price behavior better. The best part of this is that knowing how to identify support/resistance can also help you identify the best areas to enter or exit a certain position on binomo.
That said, trends don’t last forever, which means they’ll have to reverse at one point or another. When this happens, prices will sometimes first break through the support or resistance levels. It doesn’t happen all the time, but knowing how to recognize it will help you tons in your trading journey.
This guide will teach you how to identify breakouts from the support/resistance levels and what you can do next when you encounter this scenario.
How to identify breakouts from the support or resistance levels
You probably already know what support and resistance levels are, but if you don’t, here’s a quick explanation. Support and resistance levels refer to the areas where the prices tend to stay. When you say support level, that’s the price level where the price can’t seem to go down. When you say resistance level, that’s the price level where the price can’t seem to go up.
These areas are very significant when it comes to trading because they can tell a lot about supply and demand, as well as market behavior in general. In fact, they’re a favorite tool amongst technical analysts due to their simplicity and reliability.
What makes these areas so significant? Think of it this way. Support and resistance levels can predict which areas the price will keep coming to. For example, let’s say the price of a certain asset keeps going back to $12 as the lower number and $20 as the higher number. It usually goes higher than $12 but lower than $20, but it can’t seem to break past those two prices. Judging from this behavior, $12 is what we’ll now call the support level while $20 is what we’ll call the resistance level.
Support and resistance levels can also be referred to as weak or strong. Strong support and resistance levels refer to areas where the prices keep going back to that certain level. If an asset is fluctuating between $12-$20 but it has already touched $12 five times over a 30-minute period, then that means it’s strong. If an asset only touched $12 once before breaking through completely, then that means it’s weak.
For prices to break out of the support or resistance levels, the price momentum needs to be particularly strong. If the price momentum is weak, prices will typically stay within the support and resistance areas.
How to know if price momentum is strong enough to break through support/resistance
If you want to be able to use this strategy well, you have to know first and foremost how to identify a strong momentum. This can be easily done by using a candlestick chart.
On a candlestick chart, the first thing you should do is to identify the prevailing trend, regardless of its direction. If it’s a strong uptrend, you’ll see several larger than average green candles forming in a consecutive pattern. If it’s a strong downtrend, you’ll see the opposite: multiple larger than average orange candles.
So, when does this usually happen? Typically, a strong price momentum occurs when there’s an economic event or news happening at the moment. Events like this could be a company merger, a new board of directors, or something related to the asset that you’re trading. Check out any major news story related to a financial asset. Look at the date, and then consult the charts. Usually, you’ll see the prices will move in a certain direction just after the news gets released. At times, these movements are strong enough to actually break through support or resistance levels.
Sometimes, price consolidation could also happen before prices break out of support or resistance. This means that the price will fall within a narrow range, with no real signs of reversing or continuing a trend. Once the price starts approaching the support or resistance levels, that’s when it begins to gain enough momentum to actually breakthrough. In most cases though, the price will usually just fall back within the support/resistance level and go on as normal.
How to avoid false breakouts
There are also times when a false breakout may occur. In these instances, the prices will indeed break out of the support or resistance level, only to fall back within the right after just a few sessions.
It’s during these false breakouts when traders incur the most losses. Why is that? Well, many traders jump on a false break immediately, thinking that the trend will continue. That’s why, when the price goes back to its previous range, it will simply mean a loss for the traders.
If you want to identify breakouts and avoid false breakouts, you should keep an eye on how the price behaves during strong price momentum. What trend develops when it hits a strong support/resistance? Is it a downtrend? An uptrend? The answer to this is a good indicator if a breakout will continue or if it will just fall back within range.
Take a look at the snapshot below. In this screen, you’ll see that the prices actually developed a downtrend before hitting the resistance. Suddenly, there’s a strangely out-of-place bullish candle that breaks out of the resistance.
Although you may want to enter a higher position, make sure that you wait for a bit to see what will happen first. In the case of this example, you can see that a solid bear candle suddenly appears, breaking the support and turning the trend into a downtrend.
What to do if the price breaks the support/resistance on Binomo?
First of all, price breakouts from weak support or resistance levels usually mean that the trend will continue in whatever direction it’s going. On the other hand, price breakouts from strong support or resistance levels are not that reliable. You should first observe price behavior before the price hits that level. This will help you identify breakouts – real ones, that is.
If a breakout does happen to be real, don’t be too hasty in making decisions. Wait for a bit until the markets start behaving the way they did before they hit the support or resistance level. You should make your decision based on what trend develops. If an uptrend seems to be developing, enter a buy position. If a downtrend seems to be developing, enter a sell position.
You may be asking, why do false breakouts even happen? There are various reasons, of course, but most of the time, they happen because the market is already overextended. That means the trend was bound to reverse in the first place, it just didn’t happen immediately. In the case of the screenshot above, we can safely assume that a false breakout happened because many traders assumed the trend was going to continue going up after breaking out of the resistance.
Professional traders, however, are experienced enough to know that this isn’t always the case. They forgo their emotions and choose to wait and observe first before entering any position. When the downtrend began happening, that’s when they knew it was a good time to enter a sell position.
Protecting against false breakouts: how to enter trades based on price trends?
Trading during false breakouts can mean expensive mistakes for any trader. That’s why it’s important to know how to protect yourself against false breakouts.
In the first place, you should know how to determine price behavior, especially when it’s about to touch the support and resistance level. This is typically done by reading your chart. Make sure to use a larger time frame than your trading time frame to make it easier for you to analyze the charts. For instance, if you’re trading on the 5-minute timeframe, you should analyze the chart from a 30-minute or even 3-hour standpoint.
There are also some times when the price will keep breaking through the support and resistance levels. This is understandably confusing for a lot of traders, but the right tools, indicators, and a good deal of patience can save you from making a bad decision.
One of my personal favorites is the Binomo Bollinger Bands indicator. You can use this indicator in many ways, such as when the price starts approaching the support or resistance zone. Once the price begins to fall and break the lower band, that’s the time that you should go short.
Above all else, you’ll need lots of patience and practice if you want to learn how to identify breakouts from support/resistance on Binomo. Don’t worry, you can easily do this by opening a free demo account on Binomo today. Practice makes perfect, so they say, so make sure that you get a lot of practice!
Good luck on your trading journey with Binomo!