Education


How to find support and resistance

Being able to locate support and resistance is an
essential skill for every trader no matter what his/her strategy is. The good
thing is that there’s no need to get fancy. Simpler solutions work better
because the strongest levels are those that are evident to the majority of
traders. Support and resistance levels do not appear magically out of thin air.
They form as orders cluster in places where many traders expect the price to
stop.

Discover More
Technical Analysis
Techniques

There are several approaches to identifying important
market levels. In this article, we’ll go through the most popular of them
providing the tips from our experience. These techniques involve swing highs
and lows, psychological levels, trendlines, moving averages, pivot points, and
Fibonacci.

Swing highs and
lows

A swing is a distinct movement of the price chart. Highs
and lows of such moves are the natural reference points for traders. Take note
of swing highs and lows in the visible area of the chart. Don’t forget to check
higher timeframes for levels that are not normally in your field of vision but
that can still create obstacles near the current price. The more times a level
stopped the price and made it reverse, the stronger it is.

Psychological
levels

A level is considered psychologically important when
its price quote ends with 0. The more zeros a level has, the more important it
is. If you ask for someone’s opinion about the future price of EUR/USD, no
one will say something like 1.1932 but they can mention 1.2000 or 1.1500.
Traders respect such levels for the sheer awe of round numbers.

Trendlines

Diagonal lines are also important. Remember that you
need at least 2 points (2 highs or 2 lows) to draw a trendline. There should be
about 20-30 candlesticks between these points so that the trend had a 45-degree
angle. The more times the price touches the trendline, the stronger this
trendline becomes.

Moving Averages

Although moving averages lag behind the price in a
sense that they are slow to reflect the most recent changes of the market, they
act as good support/resistance levels. We recommend using 200-, 100- and
50-period lines for this purpose. These MAs are especially strong hurdles for
the price on the weekly and daily charts because many “big bank” analysts use
them.

Pivot points

It’s when math comes to trading. Pivot points are
calculated on the basis of previous highs, lows, and closing prices. There are
many custom indicators that will draw these levels for you. We recommend using
Pivot Points Multitimeframe indicator for MetaTrader. It shows a central pivot
level, 3 support levels and 3 resistance levels for each timeframe. The
indicator will let you see daily levels applied to any other timeframe you use.
We usually use weekly levels of this indicator. They are redrawn after the end
of every week and provide a very good idea of what the scope of the pair’s
movement will be like during the coming days.

Fibonacci

Fibonacci is the classics. Use this instrument
correctly: spread the line from the left to the right and take into account the
candlesticks’ shadows. The key levels of the Fibonacci retracements are 38.2%,
50%, and 61.8%. A correction is expected to end at one of these levels so that
the overall trend could resume.

Final tips. No matter which technique you use, remember that support/resistance is
never an exact level but always an area. Don’t limit yourself to only one way
of finding support and resistance. When different levels converge, they become
stronger.

This article was provided by FX
broker FBS.


ForexLive



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