Understanding Support and Resistance Levels

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Resistances and Supports are two of the most important technical indicators that are used to trade the spread betting markets. In order to acquire a good understanding about how to use them best, you need to learn about their relationship with pivots points.

 

Introducing pivot points

A pivot point is an important level in technical analysis which is used by traders as an analytical indicator of market sentiment. A pivot point is calculated by using the average of key prices levels (high, open, low and close) based on the trading performance of an asset during a previous time-period. If price climbs above this pivot level in subsequent sessions, it is assessed to be advancing in a bullish manner. In contrast, if price trades below the pivot level then it is evaluated to be bearish.

Pivot levels are normally supported by the additional levels of support and resistance, which are respectively posted below and above the pivot point. A pivot point and its related resistance and support are levels at which price will frequently alter direction. In a bullish trend, the pivot point and resistance levels act as ceiling levels at which retractions and reversals often occur. In a bearish trend, a pivot point and support levels define the lowest levels at which price will normally rally.

You can calculate pivots levels by using the previous day’s price movements and then can identify new trading opportunities after price hits a related support or resistance line. You will find that all new support and resistance lines are determined as a top priority each morning by the trading platforms supplied by spread betting brokers. As such, you just then need to wait for price to hit these entry points before opening new spread bets

You may be surprised to discover that pivots, supports and resistances are possibly the most popular trading method utilized in the spread betting markets today contrary to the opinions of many experts. You should realize that these indicators have been used by many traders to identify optimum entry points for new trades for a considerably long period of time.

The pivot point is now used extensively by experienced spread betters. You will appreciate that new technology has made the calculation of pivots very easy. In addition, many trading platforms that are supplied by spread betting brokers will produce pivot levels and their related resistances and supports automatically for you.

 

The importance of Pivots, Resistances and Supports

You must always remember that the price of underlying assets supporting spread bets has only a limited number of directions in which it can travel, i.e. up, down, or sideways. As such, you should consider that price is similar to an elastic band since it always rebound to an equilibrium point at which it will then be in perfect balance.

If price then moves in a new direction, it will again rebound to its equilibrium sooner or later. The spread betting markets are driven in this way by daily events such as fundamental news releases, etc. You will find quite often that, on subsequent days, similar events will drive price in new directions. As such, you can use a combination of pivots, supports and resistances to help you assess the distance that price will traverse before it rebounds.

You can observe these effects by studying the trading charts displaying pivots, resistance and support levels. You will then notice price frequently rebounding against a support before progressing higher. Again, you will observe price retracting against resistance levels. If you use the daily charts, then you will discover that the pivot levels are determined by using the open, high, low, and close values of the previous day’s trading. Always remember that if you use the longer time frames, then resistance and support levels are more effective because of the improved quality of the statistics.

Pivot levels can provide you with an important advantage over many other technical indicators. This is that you can place your own interpretation on the readings of other tools, such as the Fibonacci retracements and Elliot waves, etc., which can be completely different from those of other traders. This means that you could trade in a different manner to other investors despite studying the same raw information. In contrast, pivot levels generate signals that are simple to analyze.

You still need to be able to identify trends in order to become a successful at spread betting. Pivots, resistances and supports can help you again with this task because they work best in trending markets. Their entry and exit signals can let you know when new trends are beginning to form.

 

Utilizing Resistances and supports when spread betting

When you commence spread betting, one of your top priorities will be to either to design or acquire a strategy that will alert you about new trading opportunities. You can then use this data to determine the best timing for the opening and closing of new spread bets in order to maximize your profits.

One of the best and most commonly ways of achieving this object is to use pivots and their associated resistances and supports. For instance, if an asset is climbing and then hits a pivot point; it will then most likely reverse direction and drop in value. If you can master the technique of utilizing pivots, resistances and supports to accurately forecast the future movements of price, then this would be a very lucrative skill to possess. You will find that many spread betting experts have incorporated and integrated the concepts of these levels into their trading strategies.

These key levels are powerful tools because you can evaluate the future directional movements of an asset by using just small amounts of information and simple equations. If you incorporate the concepts of pivot levels with those of resistance and support, then not only can you forecast the direction of price but also how far it will most likely traverse in its new direction. A pivot point is defined as the level that the current price trend is mostly likely to cease moving in its current direction before reversing. You should regard a support level as the lowest point of the current price formation that the market will regularly rebound against before turning upwards. Similarly, you should view resistance as the highest point of the current chart formation that price will rebound against before turning downwards.

Price usually needs significant amounts of pent-up energy to fully pierce a support or resistance level and frequently bounces against them a significant number of times before it achieves this goal. However, once price is able to achieve this objective, its momentum is so great that it quite often gives birth to a brand new trend. In these cases, you will observe that an old resistance will become the new support while an old support becomes a new resistance.

 

Calculating Pivots, Resistances and Supports

Pivot points, resistance and support levels are usually calculated using the following formulae.

Pivot point = (Low + Close +High)/3

Support = (Pivot – High)*2

Resistance = (Pivot – Low)*2

Once you have calculated these figures at the end of a trading day, you can then use them to update your trading strategy on the next day. For instance, if you detect the following morning that the market has started trading below the pivot point of your underlying asset, then you should consider opening short spread bets.

You can identify breakout opportunities should price pierce though either a support or resistance and close on the other side. You should open a short spread bet in the former case and a long spread bet in the latter one. Always protect yourself from fakeouts though by confirming that price has closed either above a resistance level of beneath a support. You will find that using resistances, supports and pivots can provide you with high quality alerts that you can then utilize to execute new spread bets.

 

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