Useful tips to identify support and resistance levels

Author: Forex Live | Category: Education

A couple of pointers on the basics of technical analysis


Trading requires a wide range of skills, which sometimes can range from simple techniques to complex patterns. Being able to identify both support and resistance prices trends more towards the former, though this is no less important for any respective trading strategy.

At first glance, even novice traders can locate specific levels at which prices inflect. Rather, support and resistance levels form as orders cluster in places where many traders expect the price to stop. In this way, it becomes useful to pinpoint in advance these specific points in order to optimize any trading strategy.


Ultimately, there are multiple approaches to identifying important market levels. These techniques involve swing highs and lows, psychological levels, trendlines, moving averages, pivot points, and Fibonacci, among others.

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.

It is important to not to 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.

Making use of psychological levels

Next up is psychological levels, which are points that are considered to be 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.

Harnessing trendlines

Diagonal lines are also important just as numbers are with several zeroes attached to them. It is important to note 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. One way to utilize moving averages is to rely on 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.

Exploring pivot points

Pivot points represents an instance 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.

One way is to look at Pivot Points Multi-timeframe 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.

A good starting point is to analyze 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 constitutes one of the core trading strategies that exists for users. In order to use this instrument correctly it is important to spread the line from the left to the right of any chart and take into account the candlesticks' shadows in the figure. In the example above, 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.


- This article was submitted by LegacyFX.
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