In order to become successful, any novice trader needs to learn what support and resistance levels are. It is these tools that make it possible to determine the real trend present in the market, as well as timely receive signals about the beginning and end of a price impulse.
Support and resistance levels are straight lines drawn through the points of local minimums and maximums.
The price area at which the majority of traders begin to create buy orders is called the support level. The resistance level, on the contrary, is the price area at which most traders begin to open sell orders.
You can see the support and resistance levels in the figure below.
Working with support and resistance lines
Any support and resistance line strategy is focused on the behavior of the price level in “critical” zones. It should be remembered that the support level gives the necessary impetus to buy transactions only until it is broken. Immediately after it is broken, the number of sellers will significantly exceed the number of buyers, and the price level will begin a confident downward movement.
For successful trading, it is not necessary to use only one of the impulses: a breakout or a rebound. A trader can trade on the Forex market in a way that is convenient for him.
Trading along support and resistance lines can be of the following types:
- On the rebound. This method involves creating buy orders in situations where the price level approaches a support level, and sell orders when the price approaches a resistance level. A similar method is quite often used for sideways trading. The specific differences of such trading are that transactions are opened on a rebound from support or resistance levels, and they are closed in accordance with indicator signals.
- For a breakdown. This method involves opening sell orders when the price pushes through the support line, and opening buy orders when the price level begins to overcome the resistance line. All breakout strategies are used for trend trading in situations where there is a fairly strong trend in the market. The best option is to create orders at a time when the price level has left short-term consolidation. This usually occurs when a price level breaks through a resistance or support line.
- Mix. This method involves trading when there is a rebound from support or resistance lines, as well as when the price level approaches them. If the price breaks through one of the levels, then open orders are changed to the opposite ones. This method of trading makes it possible to carry out quite profitable trading during sideways trends, and when strong downward and upward trends appear, quickly adjust and take part in their movement.
Below I offer you an example of a strategy that involves using support and resistance lines for trading.
Strategy "Support and resistance"
This strategy is popular among domestic and foreign traders; it is based on horizontal lines of resistance and support. A break through one of these levels acts as a signal about the start of a new trend. To apply this strategy, no additional .
The resistance level is drawn through two highs of large candles, which allows you to create a straight line without taking into account lower price values. The support level passes through the two lows of the large candles, which makes it possible to create a horizontal line that will ignore the higher lows.
Support and resistance lines are drawn as shown in the figures below.
If you find it difficult to draw support and resistance lines yourself, then you can use the free TzPivots indicator, which will do everything for you.
The strategy described above is not a win-win strategy, since after breaking through the support or resistance level, the trend may reverse. For this reason, you should not immediately risk real money, but it is best to test it on.
Hello, gentlemen traders! Today you will learn all about support/resistance levels and their application in trading. They are the basis of almost all Forex strategies, even if your trading system does not use support/resistance levels, knowing about them, as well as the ability to identify them on the chart, will put you one step ahead of other traders, since the levels are excellent targets for placing a take. -profit and safety stop orders. If up to this point you have been steadily draining your deposits, moving from one strategy to another, then today you will start making money on Forex. By learning to identify support/resistance levels, you will not only get a working trading strategy, but you will also understand what is behind the levels, what caused the price reversal, and much more. It may be difficult for you to build levels manually at first, but you can use the support/resistance level indicator, which can be downloaded at the end of our review.
What are support and resistance levels?
Forex support and resistance levels are considered one of the most powerful technical analysis tools. Using levels, you can make predictions about price behavior in the future. Support/resistance levels (also called supply and demand levels) are determined by prices on the chart in the past, where buyers and sellers opened positions of such volume that the direction of price movement changed. Support/resistance levels are indicated using horizontal lines at those points where the market reversal occurred.
Support/resistance levels work on any currency pairs, gold, silver, oil, stocks, stock indices, CFD contracts, cryptocurrencies, etc. They can be built on any timeframes, but you should understand that levels built on M5, M15 and M30 lose their significance very quickly, while the levels at H1, H4 and D1 remain significant for a long time.
How to determine support and resistance levels?
To plot a support level, you need to find at least two lows on the chart at the same level where the price reversal occurred, connecting them with a horizontal line. For a resistance level, you need to connect two highs with a horizontal line.
You can build support/resistance levels using the shadows or tails of candles, as well as their bodies.
Sometimes it is better to work not with support/resistance levels, but with zones. This is especially true for small time frames, when it is impossible to draw an exact level at one price. In this case, support/resistance zones are drawn using rectangles in the trading platform toolbar.
When does support become resistance?
When the price breaks down a support level and then moves back to that level, but fails to break through on the other side and continues its downward movement, the old support level becomes the new resistance level.
When can resistance become support?
When the price breaks through a resistance level upward and then moves back to that level, but fails to break through it on the other side and continues its upward movement, the old resistance level becomes the new support level.
Trading by support and resistance levels
Before you start trading using support/resistance levels, you need to find them on the chart and mark them with horizontal lines. Since for all traders these levels are a guideline for entering a trade, this observation can be used for trading. When the price approaches a strong level, two scenarios can be expected: a rebound from the level or its breaking through. The most likely option is a rebound from the level, since at this time most traders close their transactions, take profits and open new positions designed for a market reversal. In addition, large volumes are needed to break through a strong level. Let us remember that this applies mainly to strong levels. However, they can also be broken in due time under the influence of important economic events.
Trading from the resistance level
If the price has approached the resistance level and a downward reversal is expected soon, you can open a sell trade by placing a stop loss above the resistance level.
Trading from support level
If the price has come close to the support level and an upward reversal is expected soon, you can open a buy deal by placing a stop loss below the resistance level.
conclusions
So now you know what support/resistance levels are and how to use them in trading. Of course, it is important to understand that not all levels are created equal. There are strong levels that do not lose their significance for years, and there are weak levels that sometimes are not even worth paying attention to. You should not clutter the chart with countless levels. Choose only high-quality and beautiful levels. It is also necessary to remember that support/resistance levels are just a technical analysis tool, and not a ready-made strategy. If you use it in combination with your strategy, you will have a powerful trading system.
Download the indicator of support and resistance levels
Trading by levels
Levels are one of the most universal elements of graphical analysis, which can be used regardless of the type of trading system. You can trade using candlestick analysis, moving average crossovers, or using an insanely large number of indicators, but regardless of this, levels are always in play. But a more interesting fact is that a trader may not know a single type of analysis or a single indicator (which is, of course, undesirable) - and at the same time successfully trade at resistance and support levels.
It is these trading signals that we will use in our trading system. This strategy is applicable on time periods from M1 to MN both in the Forex market, futures and stocks. It is impossible to trade orders without knowing the levels, because it is the knowledge of price levels that gives the trader a foothold. Placing orders based on your own financial capabilities or expectations is, at the very least, unreasonable and, at most, dangerous.
Let us highlight three main groups of movements suitable for concluding transactions near critical levels:
1.Level from the level.
2. Level breakdown.
3. False breakout.
- trades from resistance and support levels. Rebound from the level;
Based on the name of the trading method, we will enter the market after the price rebounds from the support or resistance level. Here you should not make the mistake of placing an order directly at the support or resistance levels themselves. When we trade a rebound, we want to find a balance between potential profit and risk, given that the price will move in the opposite direction from the level. Therefore, we need confirmation that this level will withstand the onslaught of the market. Instead of opening a position immediately when the level is touched, you should wait until the price bounces off the level and only then open a trade. Market wisdom says that catching a falling knife is very dangerous...
- transactions when passing resistance and support levels. Level breakdown;
There are no levels that are 100% likely to withstand the onslaught of price movement, so trading only rebounds from levels is not enough to win. Support and resistance levels are often broken, which is usually followed by an accelerated movement beyond the level. It is important to know what to do when price breaks support and resistance levels. There are two approaches to trading breakouts: aggressive and conservative.
Aggressive approach
The easiest way to trade breakouts is to buy and sell whenever the price moves firmly through the support and resistance zone. In this case, we should expect a sharp impulse movement beyond the level. If the price has passed the resistance zone but there has been no strong movement, then we need to close the position. We will analyze the reasons for strong movements from levels later.
Conservative approach
After the breakout, many traders begin to sell their unprofitable positions, and the price falls, but after closing long positions, the balance of supply and demand returns and the price rebounds a little and comes close to the broken level and begins to fall again. This is one of the reasons why support levels become resistance after a breakout and vice versa.
To take advantage of this phenomenon, you need to be patient. Instead of entering a position immediately after a breakout, you wait for a pullback to the broken support or resistance level and enter a position immediately after the rebound from that level.
It is important to take into account one important circumstance here. “Retests” of broken support and resistance levels do not happen all the time. There will be times when the price, after a breakout, will move in one direction without pullbacks.
- false breakout
A false breakout is one of the most unpleasant things for a trader, which has caused many losing trades and millions of people around the world fall into the trap every day.
False breakout – this is a breakdown of the support/resistance level by the asset price chart, when the asset price cannot gain a foothold at the achieved level and rolls back, and this happens within one candle.
All market movements represent the formation of levels, as well as breakouts (or rollbacks) from them. False breakdown is the most interesting because it allows you to enter the market at the point of minimum risk and maximum potential for profit.
Classic false level breakout represents bullish and bearish traps at resistance and support levels. Such traps are patterns of 1-4 bars (candles), which can be defined as a false breakout of the support/resistance level. Most often, this happens during a directional long-term movement and prices approach key levels. Many of the traders in this kind of situation think that since the price has begun to approach very aggressively, it means that a breakout will occur, so they begin to sell or buy at the breakout, but the market often begins to reverse, and players suffer losses.
Types of “false breakouts”
1. Trap in the form of a classic bull and bear at key market levels
Trap - A bullish, typically 1 to 4 bar pattern that is defined as a “false breakout” of a key market level. These "false breakouts" occur after large directional moves as the market approaches a key level. Most traders tend to think that a level will break out just because the market has approached it aggressively, they will then be able to buy or sell the "breakout" and then many times the market will trick them into creating a bullish or bearish trap.
A bull trap forms after a move up, amateurs who are simply watching for major changes cannot stand the temptation and they enter the market above or at a key resistance level because they feel confident that the market is anticipating momentum to break higher. The market then stops just above the level and fills all the breakout orders, and then drops lower as experienced players come in and push the market lower, leaving amateurs trapped in a losing long position.
2. Consolidation of “False Breakouts”
Consolidations of “False Breaks” or trading ranges are very common. It is very easy to fall into the trap of waiting for a breakout of a trading range, only to see it turn back into the range. The best way to avoid this trap is to simply wait until there is clear data outside the trading range on the daily chart and then you can start looking for price action signals to trade in the direction of the breakout.
False breakouts can create long-term trends.
You need to pay attention to the “tails” of candles that appear directly or near key levels in the market. How do prices react during each day's session, or where do they close? The most important level of the day occurs at the close, and often if the market fails to close beyond a key level, this can signal significant "false breakouts". Often there is an attempt to break out of prices in the market, but by the close of the day the price has rejected this level, showing a “false breakout” or testing the “false breakout” level. A market failure to close an off-limits key market level can result in a big comeback or trend change. Thus, the closing of the price bar is the most important level.
Traders who cannot anticipate and identify deceptive situations or “false breakouts” in the market will lose their money to those who can. If you pay attention to the price behavior at key levels on the daily chart, you can clearly see “false breakouts”.
Finally.
It is good to sell from the resistance level, and to buy from the support level. When the resistance level is broken, it is good to buy, and when the support level is broken, it is good to sell. In any case, it is better to make trades in the direction of the prevailing trend. Trades when passing resistance and support levels. Such transactions are usually made when the price leaves the consolidation zone. The exit from the consolidation zone should not only be abrupt, but also very significant. Buy when passing a resistance level Trades from resistance and support levels. These transactions are made in the expectation that the levels will hold, which is what happens to them in most cases. At the same time, it should be noted that almost always transactions from levels are made against local, short-term movement. After all, if you decide to buy from a support level, the market is almost always above this level and you must first wait for the price to decline. The same is true the other way around when you sell from a resistance level. Buying from a support level after a false breakout of this level A false breakout of a support or resistance level is a price movement in which the exit from the level was short-lived, when the price was unable to gain a foothold at the new price level. This is usually explained by the speculative nature of price movements, played out by some market participants or arising under the influence of short-term factors. In the event of objective fundamental reasons, the price in the vast majority of cases carries out a transition of prices to a new level, reflecting new important information entering the market. Buying when passing a resistance level from this level after returning to it This trading strategy uses the rule that resistance levels after their passage usually become support levels. The advantage of this trading method is the wait-and-see position that the trader chooses. The latter waits for a confirming signal that this is not a false breakout of the level, and enters into a trade only after a second move away from the resistance level (now the support level). Selling when a support level passes from this level after returning to it This trading strategy uses the rule that support levels after their passage usually become resistance levels. Here, as in the previous example, the trader waits for a confirmation signal that the breakout is not false and enters into a trade only after a second move away from the support level (now the resistance level).
Trades in the direction of the main trend. These transactions are made exclusively in the direction of the current trend with the expectation of its continuation and usually such positions are held for a long period of time. The main reason why transactions are not made from the extreme levels of resistance and support or when they pass (the best in terms of mathematical expectation) lies in the specifics of such levels.
Today we will try to figure out what is trading from support and resistance levels.
Even if you are a novice trader, you have still noticed how the market, moving in a certain direction, at one point seems to hit a wall that it cannot overcome.
After such a situation, there is a high probability of a price rollback, after which, having hit a new wall, the price again tries to break through the early line and, if it succeeds, a strong jerk is observed in the market.
This situation arises due to support and resistance levels, and the main pattern of the market is that the price moves from level to level, while resistance, at one point, becomes support and vice versa.
Let's consider two methods of trading options from levels- indicator and non-indicator...
By trading binary options from levels, you will find the most profitable moments to enter the market, because the price near them is always active and they are the point from which the price movement gains momentum!
Many novice traders do not attach importance to them, however, as my practice shows, a lack of understanding of the basics of price movement and graphical analysis always ends badly for the trader.
The main feature of trading from levels is that they work on all possible assets and currency pairs, as well as timeframes, and by adding them to your strategy, you can easily calculate probable goals.
Benefits of Options Trading from Levels
The Forex market represents a certain amount of money that passes from one hand to another. It is precisely this transition, since there is only one product in this market - money!
You, as a trader, take money with your decision (if it is correct) from other traders. If wrong, then others take money from you! Yes, it's time to open your eyes and know when you are making money, someone lost money and gave you the opportunity to take it back -)
At this point, it is important to understand one simple thing - although we trade binary options, but in fact the market is ruled by large players who trade Forex. That is, we trade from the expiration of options, and Forex traders trade from take profits and stop losses!
It is as a result of traders placing protective orders that seemingly invisible price levels appear on our charts.
And, since everyone learns from practically the same textbooks, albeit in different languages and in different countries, the principle of installing protective orders is fundamentally the same for everyone.
The most popular places for setting stops are points, either at local highs and lows, or at the highs and lows of the signal candle, the closing price of the opening of the day.
In order to take money from a player, it is necessary to knock him out of the market, that is, to disrupt his stop orders. That is why the price moves from level to level. I think the principle is clear? By trading binary options from levels, we can collect many times more profit, rather than Forex traders.
While the price knocks out their stops and reverses, we collect the cream at this reversal by correctly calculating the expiration of the options we trade -)
Options for constructing support and resistance levels
There are two ways to determine support and resistance levels, namely graphically and mathematically. Both approaches have merit, and their levels are equally valid, since these methods are used by the general public.
Graphic construction of levels
It is quite simple to build levels for trading yourself - you will need such a simple tool as horizontal lines, which is available in any MT4 terminal.
In order to confidently draw a line and claim that this is a support or resistance level, you need to find at least several points of conditional contact when the price repeatedly approached it and fought back from it.
- Support level– this is the level that is below the price and acts as a springboard from which the price rebounds towards the bullish trend. On the chart it is determined by the lower tails and/or bodies of the candles;
- Resistance level– this is the level that the price is trying to overcome. It is plotted on the chart at the tops of the candles.
- When the price breaks through the support level, it becomes a resistance level. And vice versa.
An example of marking levels manually, see below (the numbers show the points at which the levels are drawn):
It is important to understand that each level has its own weight and strength. This depends on the timeframe on which the levels are tracked and on the frequency of its breakdown by the price.
And, the more often the price tried to break through the level, but could not (the more points on the basis of which the construction takes place), the stronger it becomes.
Mathematical construction of levels
The mathematical approach to building levels means the use of technical indicators...
As a rule, levels are built using two methods, namely:
- Trading using Murray levels, which is actually what the indicator is called;
- Trading from levels using Pivot points.
An example of constructing levels of the Murray indicator is shown below:
You can download the Murray indicator from this link... You can learn how to install indicators in the MT4 terminal from this article...
Trading from rebound or breakout levels
There are only two options for trading by levels, namely:
- On a rebound from the resistance/support level;
- To break through the resistance/support level.
Breakouts of strong levels are not that common and can be deceptive, but if you correctly identify the breakout, you can make very good money. Especially if you have available or strategies in your arsenal.
A rebound from the level is a more frequent occurrence. However, you should not lump all levels with the same brush. In practice, weak levels are most often broken through, and the price passes through them like a knife through butter.
The price most often rebounds from strong levels, but at a certain moment, against the backdrop of economic news, you will be able to observe their breakthrough, which in most cases will be false.
Exactly Therefore, trading based on levels is important to use in conjunction with other instruments.
For example, for trading options based on levels, oscillators such as oscillators, which are included in many strategies, such as this one, are excellent. Or the RSI indicator, which is also a frequent inhabitant of many binary options trading strategies.
Trading strategy based on levels
As an example, I propose to consider a very simple strategy for trading options from levels based on a stochastic oscillator:
- We buy an option to increase if the price has approached the level from top to bottom, and the stochastic oscillator is in the oversold zone (from 0 to 20);
- We buy a downside option if the price has approached the level from bottom to top, and the stochastic oscillator is in the overbought zone (from 80 to 100).
In conclusion, it is worth noting that trading from support/resistance levels is the base, which every trader should master on a subconscious level, because it is the levels that allow you to see the further potential of the movement, its direction and, most importantly, the turning points.
One of the most important skills in foreign exchange trading is the process of finding support and resistance levels. This is so because knowing the basics of support and resistance improves any trading method. Therefore, recognizing key levels is critical to the success of any trader. In this article, I will teach you how to identify these key levels and how to take advantage of them.
What is Support and Resistance
Support and resistance are certain levels or zones on a trading chart where the price of a Forex pair (or stock, commodity, etc.) is likely to settle. The reason for this is that these psychological levels show different attitudes of market participants. When price reaches this level, it may result in a rebound in the opposite direction of the trend or consolidation (horizontal price movement). In addition, the level may be broken and the price may make a rapid move.
Support and resistance are areas where the interests of market participants intersect. Imagine a simple game of tug of war where two teams pull a rope across a puddle of mud. The weaker ones lose and end up falling into a puddle. In our case, it is the bulls and bears fighting for dominance in the market. Some of them believe that the Forex pair will go up and some of them believe that it will go down. Thus, we get a clash between sellers and buyers. Those who are dominant will push the Forex pair in their respective direction. Resistance and support are essential to any price action trading strategy.
What is the difference between them
The answer to this question is very simple. Support levels are located below the current price, while resistance levels are above. In addition, when the price goes down through a support level and breaks it, then this level becomes a new resistance and vice versa. In other words, by breaking a level in a bearish direction, price moves below that level and the old support levels now become the new resistance area. Look at the image below:
This is the daily chart of the most traded Forex pair - EUR/USD. The chart covers the time frame of September 1 - November 19, 2015. The green circles show where the price receives support from the purple level of 1.10957, the red circle shows the moment when the price breaks this level in a bearish direction, and the blue circle shows how the price tests the level as new resistance. This example shows how support can turn into resistance and how it can begin to act as a level with opposing strength.
How to find support and resistance levels?
For the most part, support and resistance levels are very easy to find on Forex charts. Every bottom on the chart is potential support and every top is potential resistance. Please note that I call them potential, not actual. Potential support turns into actual support when price matches its level several times. If we see the price drop to a level and then move back up, we look at that area as a possible point where the market might hit that level next time. If we see that the price bounces from this level again, then we confirm the level as support. Then we assume that the price will most likely bounce off this support again in the event of another fall. The same applies to resistance levels.
Not all support and resistance zones are created equal. We are only interested in trading from actual support and resistance levels. How is their authenticity and potential determined? There are weak supports and strong supports. There are weak resistances and reliable resistances. As you might have guessed, traders tend to stick to more reliable levels since they are more likely to indicate successful entry and exit points. More reliable support and resistance levels are those that are older and have typically been tested several times. The figure below compares two levels - stronger resistance versus weaker support:
Let's look at the EUR/USD pair again, but this time on the weekly chart. The image shows the price movement from November 2014 to November 2015. The purple line tested price resistance 7 times, while the yellow line provided 4 tests of support. The circles indicate the exact location where the levels were checked. Since the purple level is older and has been tested many times, it is the stronger level. The orange rectangle shows the area where these two levels combine and bounce up and down in an attempt to break the range. We can expect one of these two levels to be broken. Since the purple resistance is old and has held back the price more than the yellow support, I would prefer to take a position in the market in a bearish direction because I believe the yellow support will sag under the pressure of the purple resistance. In fact, this is exactly what happened at the end of the orange rectangle. The price passes through the yellow support, which should henceforth be called resistance as the price falls below the previous support level.
How to set entry/exit points
As we have already said, support and resistance levels are used to place entry and exit points on the chart. If you learn how to work with entry and exit points (S/R), this will be the foundation of your Forex trading knowledge. S/R entry and exit points are not just a lesson for beginners! This is the basis of any Forex trading strategy that every trader should know when using them! The reason for this is simple - regardless of the strategy used and the tools that are used, the price of each Forex pair is constantly approaching different support and resistance lines, and therefore we must carefully monitor the price surrounding these levels.
1) Setting entry points at S/R levels
Imagine that the price of a Forex pair is approaching an established support zone. Since the support is old and has been tested many times, I believe this level of support is reliable. For this reason, I might try to enter the market and establish an entry point after the price touches this support level. It would be best to wait until the price rebounds from this level. When this happens, I enter the market long, but only if the price bounces in a bullish direction from that level.
If you are at a support level for a long time, the most logical place to place a stop loss would be in the areas below the support. You place your stop directly below your support. This will limit losses in the event of a rebound if the level turns out to be fake and the support is interrupted in a bearish direction. Look at the example below:
This H4 chart of the AUD/USD pair shows the price movement between July 21 and August 5, 2015. The purple line is an old support level that I consider reliable and good for setting entry points. This image shows four opportunities to enter the market at support levels. The blue arrows show an upward movement, we get it after the price interacts with the purple support. Pay attention to case 3, where after a short rise, the price begins to fall rapidly and hits our stop loss. This is why it is extremely important to always use a stop loss when trading.
So this level of support gave us three good longs and one bad, which is a 3:1 success rate. Note that setting entry points to resistance levels works absolutely the same as setting entry points to support levels, but in the opposite direction.
2) Setting exit points at S/R levels
In order to set your exit point at support or resistance, you must already be in the market with a position. So imagine that you bought a Forex pair and the price moves in a bullish direction according to your point of view. Suddenly you see an established resistance area along the uptrend and you think, “Price could bounce bearishly off that old resistance and I could lose most of my profits! I have to provide for myself!” This way you set your exit point at that particular resistance level. The image below will make this clear.
This is the daily chart of the USD/JPY pair for the period between January 14, 2015 and April 3, 2015. I am long after the red bullish trend line. The thicker parts of the trend show where price finds support. While I am in a long position, I see that the price is approaching an old resistance that has already been tested several times and held the price of the yen. Therefore, it is a good approach to secure your position with an exit point below this resistance to avoid losing the profits you have already made. Whenever price touches resistance, the stop loss can be moved below the candle that touched the level. In the image above, it's the little orange line. If the price breaks the bullish resistance, then I can resume my position. But if the price makes a rapid decline, I am protected by a stop loss, as in the example above.
But what if the price bounces off resistance but then bounces back up from the red line? In this case, I see that the price is jumping up, I open a long position and again start playing the game with resistance with a mandatory stop loss. Note that in my example, the rapid decline created a bearish candle well below the trend, which ended the bullish move. Thus, the exit point under the purple resistance saved me from unwanted loss of profit. The same scenario can be reproduced from the point of reaching the support level, but in the opposite direction.
How to trade with support and resistance?
For some new traders trading support and resistance, using additional tools on the chart for confirmation can sometimes be helpful. The reason for this is that trading support and resistance can give us false signals from time to time. For this reason, some price action traders tend to confirm the signals they receive using additional trading tools such as candlestick analysis, chart patterns, oscillators, impulses, etc.
One of the most common ways to trade key levels is to try go with the flow of the market after the price has shown its bias towards support or resistance level. Buy when the price touches support and begins to rebound in a bullish direction, and sell when the price touches resistance and begins to rebound in a bearish direction. Besides, buy when the price breaks resistance and sell when the price breaks support. For example, the price touches resistance and bounces in a bearish direction. The first candle that closes lower than the previous candles can be used as a trigger for a short position. At the same time, I stay in the market until the price reaches the next important support zone and closes the candle higher than the previous one. If this happens, I will close my short position. At the same time, it gives me a signal to open an opposite position. For this reason, I could stay in position for a long time and do the same thing, but in the opposite direction.
In this article I give basic examples in pictures, but in reality, it is not quite as simple as we would like. You may find it useful to combine support and resistance levels with other confirmation tools to help you make trading decisions. In the following example I will show you how to trade S/R levels using the well known Momentum indicator.
The Momentum indicator consists of a curved line that moves around the 100 or 0.00 levels, depending on the various indicator configurations. The Momentum indicator compares the current state of the price with its previous behavior in certain periods, creating a curved line. The main signal that gives impulse is when the line crosses the 100 level in a bearish or bullish direction, giving short or long signals. For this reason, it is a good tool for testing signals and will fit our S/R trading strategy. I will open a position only when the price reacts to the S/R level, and only if this behavior is confirmed by the Momentum indicator. And I will also exit the market only if the Momentum indicator begins to behave in the opposite way. Look at the picture below.
This is a daily chart of EUR/USD between September 16, 2015 and December 4, 2015. The purple line is an important level that acts as support in our example. This level has been tested as support and resistance more than 5 times over the past year. Therefore, I believe this is a key level and I try to trade with it! As you can see in the image, during the last price encounter with purple support, the bearish candle closed just below the level. Meanwhile, Momentum breaks the 100 level in a bearish direction, which gives me the second signal I need to initiate a short position. I enter a position after a bearish trend is established, indicated by the green corridor on the chart. Gradually, the bearish trend begins to slow down and I receive a “Warning!” signal. to stop the trend in a bullish direction. Despite this, I remain in the market until I receive a bullish signal from the Momentum indicator.
This happens in the blue circles when Momentum breaks the 100 level in a bullish direction and gives me a bullish signal. This is my exit point, and I exit the market. The short position made me almost 450 bearish pips in profit within 6 weeks.
Conclusion
As a supplement, you can also use, of course they cannot compare in reliability and quality with manual finding, but for initial training they will be very helpful.
Support and resistance levels are zones that mark psychological trading levels.
S/R trading levels are used to set entry and exit points on the chart.
Support is a level below the current price. Resistance is a level above the current price.
Any bottom can be support, and any top can be resistance.
The longer a level is tested, the more reliable it is.
Support and resistance trading can be used in conjunction with additional trading tools such as the Momentum indicator in order to identify as many false signals as possible.
Support and resistance levels are important to any Forex trading strategy.
