Techniques for locating support and resistance
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.
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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.
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.
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.
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.
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 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