Introduction to Trading Using Support/Resistance Flips
Trading using support/resistance flips is a popular strategy used by traders to identify potential entry and exit points in the market. This strategy is based on the principle of support and resistance levels, which are the points on a chart where the price of an asset tends to stop and reverse. These levels are determined by the buying and selling activities of traders and can be used to predict future price movements.
Understanding Support and Resistance
Before we delve into the concept of support/resistance flips, it’s important to understand what support and resistance levels are.
Support Levels
A support level is a price level where a downtrend is expected to pause due to a concentration of demand. In other words, as the price of an asset gets closer to this level, it is likely to face increased buying pressure which can prevent it from falling further.
Resistance Levels
Conversely, a resistance level is a price level where an uptrend is expected to pause due to a concentration of supply. As the price of an asset approaches this level, it is likely to face increased selling pressure which can prevent it from rising further.
Concept of Support/Resistance Flips
The concept of support/resistance flips, also known as role reversal, is based on the observation that once a support level is broken, it often becomes a resistance level and vice versa. This happens because the market participants’ psychology changes after the price breaks through a support or resistance level.
Support Turns Resistance
When the price breaks below a support level, that level often becomes a new resistance. This happens because the traders who bought near the support level and are now in a losing position will likely want to sell as soon as the price returns to their break-even point, thereby creating selling pressure.
Resistance Turns Support
Similarly, when the price breaks above a resistance level, that level often becomes a new support. This is because the traders who sold short near the resistance level and are now in a losing position will likely want to buy to cover their short positions as soon as the price drops to their break-even point, thereby creating buying pressure.
Trading Using Support/Resistance Flips
Trading using support/resistance flips involves identifying these levels and making trades based on the price behavior around them. Here are the steps involved in this strategy:
Step 1: Identify Support and Resistance Levels
The first step is to identify the support and resistance levels on the chart. This can be done using technical analysis tools such as trend lines, horizontal lines, or Fibonacci retracement levels.
Step 2: Watch for Breakouts
Once the levels are identified, watch for price breakouts. A breakout occurs when the price breaks through a support or resistance level with increased volume.
Step 3: Trade the Flip
After a breakout, wait for the price to retest the broken level, which should now act as a new support or resistance. If the price bounces off this level, it confirms the flip and you can enter a trade based on this confirmation.
Conclusion
Trading using support/resistance flips can be a powerful strategy when used correctly. It allows traders to take advantage of the psychological shifts in the market and make informed trading decisions. However, like any trading strategy, it’s not foolproof and should be used in conjunction with other technical analysis tools and risk management techniques.