In Forex trading, such technical analysis tool as Support and Resistance levels are crucial –learning and understanding the process of drawing Support and Resistance levels is a base element of technical analysis.
Readers should be motivated to read this article as it imperative to learn to draw support and resistance levels. Then they can be seen automatically to predict trends, patterns, setups and make the right trade.
This article will investigate the following: what is Support and Resistance levels, what kind of benefits it gives to the trader, how to find them and draw in Metatrader 4 and what is level breaching.
On the basis of Support and Resistance, the figures of classical technical analysis are formed, such as:
– Head and Shoulders
– Double Bottom and A Top
– Flags, Etc.
Trading in accordance with Price Action setups is non-imaginable without Support and Resistance levels. Each setup confirmation should have a basis on the ground, support or resistance, and if there is no one it is better to wait for a safer trade.
What are support and resistance levels?
Support level is a psychological price level when money is dominant and the price is not let down.
In other words, when a price is coming closer to support level a lot of traders start buying currency because they think that it is the price where it is worth buying.
Resistance level is a psychological price level when sellers who do not let the price go up are dominant. When the price is getting closer to resistance level a lot of traders think that the present price is very suitable for selling and begin to sell.
At this point, the price begins ‘jumping’ from one level to another. usually reverberating to it and sometimes punching it to go further. Below in a picture we see how in EUR/USD H1 time-frame the price is ‘clinging’ to support and resistance levels, however, they are moving evenly and in one direction. This means that the trend is down.
As we see the price tends to jump up from the lines than breaching them. The price bounced 15 times and breaks right through it only 6 times at once. It is interesting to see how the price movement becomes slower when it gets closer to a level.
In accordance with Price Action strategy horizontal levels can be of support and of resistance, which depends on the present price:
– If the price is over the determined level, the line is called support.
– If the price is below the determined level is called resistance.
If the price breaks through support level, the former support line becomes resistance. Respectively, when one breaks through a resistance level, it becomes a support. This can be clearly seen in the picture below.
How to draw support and resistance levels?
Indeed, there is nothing easier as you will see the instructions below:
1) open a terminal MetaTrader 4 and the currency chart that you wish;
2) click ‘horizontal line’ and click on the chart itself once again (the line will appear);
3) click on the line twice (it will become active) and pull down the top of the graph until this line will touch at least two price highs;
4) repeat action from the 2 step and mark another level.
It is noticeable that the higher price focus on the line is the stronger support or resistance level will be and, respectively, it will be broken in a more difficult way.
In addition, support and resistance levels differ in their age, i.e. when they have formed. Depending on time-frame new horizontal levels are appearing with time and the old ones become non-actual, therefore, it is compulsory for a trader to follow them and update it on the chart on time.
We can also see support and resistance levels when we have a ‘round’ levels which are characterized as more comfortable for the eye, for example, 1.35000, than 1.,34997 or 1.35006.
Pay attention that price highs and lows are rarely in one line equally as in drawing lessons. In most cases, they are located in a range or zone of a particular size. The stronger or, the older the analyzed level, the more ‘undercoat’ it is. I.e., the wider its support and resistance zone is.
There are not bad Forex indicators which draw support and resistance levels automatically. We are going to overview one of them in our portal soon.
How do support and resistance levels appear?
We have already mentioned that the levels that are being analyzed are peculiar points which resemble profitable places for traders for buying currency or selling. When the price is getting closer, for example, support level, a lot of market players begin buying the market price or pending orders which were placed earlier. All these actions usually ‘repel’ the price from that level and, therefore, the price is usually bouncing from that rather than breaks through it.
We see in the picture: when the price is getting into the blue support zone, the pending orders for buying begin opening and it makes the price go up.
Some of the brokers give information on how many and what kind of orders are placed, the purity of support and resistance levels can be checked in accordance with that. In other words, if bids are dominating to a level this kind of level can be called support and vice versa, offer the collection at some level will be a resistance zone.
Bids – orders for currency buying which the buyers placed.
Offers – orders for selling currency. The orders are placed by sellers.
Breaching of support or resistance levels
Breaching happens when the price reaches the horizontal level and does not turn back but breaks through it going above maximum or minimum.
Support or resistance breaching is usually followed by speedy movement. Why is that so? Because behind the level limits, traders who are trading in a narrow range, in accordance with flat strategies, place Stop-Loss orders. Due to the fact that stops (Stop-Loss) is not something else as a reverse order for that order in accordance with which the position was opened, therefore, when the price reaches stops, the movement becomes faster because it triggers a lot of stops. Please see the picture below.
As we see only from the third time the support level which is 1.30420 was breached. The quantity of sellers exceeded the quantity of buyers. Therefore, buyers could get the price down where there were the most buyer stops. This fact drove the price down further.
As a result of getting to know support and resistance levels, we can make a conclusion that there are only two trading Forex strategies which use support and resistance levels: 1) trade between levels; and 2) trade breaching the level;
The one who believes that the price is going to jump back from the level is using trading between levels and the one who believes in breaching strategy the level is breached.
It is worth mentioning that support and resistance level breach can be fake. Such a situation when a price breach level and later gets back.