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Recognizing and plotting the historical support and resistance levels on to the technical analysis charts is one of the basics each technical analysis trader should be familiar with. Manually drawn horizontal lines on openings and closures of trading candlesticks preceding the larger market reversals can help us determine possible future support and resistance levels. Generally accepted understanding is that a valid support or resistance level is defined once the price bounces of specified level for two times. On all future touches of this level we can expect the price to resist a breakout and we can trade a reversal pattern. After a certain period of bounces the price will form a breakout.
Breakout can be understood as the price breaking trough a historical support or resistance level and usually also out of a certain trading range. If a breakout happens, which eventually will happen, it will often form a distinctive pattern in form of breakout candle followed by retracement candle and later followed by another breakout candle, closing above the previous high or below the previous low, that serves as the breakout confirmation. Many trading strategies and systems can be developed upon this basic and simple understanding of support and resistance levels - either for trading the reversals or breakout patterns.
For more precise trade entries it is advised to combine RSI indicator with other support and resistance indicators, such as manually drawn horizontal support and resistance lines, trend lines or Fibonacci indicator. Understanding price action and candlestick patterns in the RSI overbought and oversold zones can give us strong signals for trading short pullbacks or longer reversal trade entries.
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