- Support And Resistance Trading | The Definitive Guide
- Why Support and Resistance Work
- How to Trade Support and Resistance in the Forex Market
- The Bounce
Three support levels and three resistance levels. Each of these levels have caused multiple reversals to take place in the past, which confirms that they are in fact support and resistance levels which have a good chance of causing more reversals to take place in the future. Support levels are supposed to support the market and stop it from moving lower, whilst resistance levels are supposed to stop the market from moving higher, thus causing it to resist higher prices. Because support and resistance levels cause the market to do different things, it means they always form either above or below the current market price.
Lets take a look at some images of support and resistance levels, so you can see how they form in relation to the current market price. Again we know for sure that these levels are actually support and resistance levels because they all caused multiple reversals to take place, and we know that they are specifically resistance levels due to the way they are all found above the current market price.
Lets move on now and take a look at what actually causes support and resistance levels to form in the market.
Support And Resistance Trading | The Definitive Guide
Most price action traders believe the reason support and resistance levels form, is because of traders repeatedly placing trades to stop the market from breaching past a price which they deem to be significant. When the market reaches one of these prices the bank traders tend to enter trades or take profits as these both require there to be orders present , which causes the price to reverse and start moving in the opposite direction.
No one knows exactly why stop loss and take profit orders build up at round number prices. One theory is that people have a psychological bias to place orders at numbers which they see as being more prominent than others.
Why Support and Resistance Work
In the forex market, round numbers i. Due to the bias not being known to the traders themselves. When they complete one of these actions the market will reverse and start to move away from the level.
Support and resistance levels can be traded in a huge number of different ways, but the easiest and most common method of trading them involves watching for price action patterns, such as pin bars and engulfing candles to form when the market reaches a level. Of course the appearance of a price action pattern at a support or resistance level does not always guarantee the market is going to reverse. You can see how the bullish pin bar formed after the market had spiked through the support level which had been marked on top of the 1.
This support level had caused five recent reversals to take place by the time the market dropped down and created the bullish pin bar.
How to Trade Support and Resistance in the Forex Market
When the market moved up through the level marked in blue a large number of typical forex traders would have entered long trades, under the impression the market is probably going to continue moving higher. Their stop losses on these buy trades would have been placed at the nearest round numbers the market broke through during the move up marked in blue. The 1. When the market drops and gets close to the 1. This is because the majority of the stop loss orders at this level had not all been placed exactly at the round number itself. Most had been placed slightly above because traders are frequently taught not to put their stop losses right at support and resistance levels or round number prices, due to them being a target for the bank traders.
Ultimately the up-move comes to an end and the market drops again. When it drops this time it falls through the 1. The number of stop loss orders placed at this level were much higher than the stops placed at the 1. When they place their trades it causes the price to rise and creates the bullish pin bar we see at the support level. This would be the time we enter our own buy trades, because the formation of the pin bar at the support level is a strong sign the market is going to reverse. The resistance level was found at the The bank traders can see that a large number of stop orders have built up around the Unlike the previous example the spike through the round number we see here does not stop just after the Instead we see it continue until it has spiked just beyond the At the same time, there is a growing number of people willing to buy it.
Many of them think the currency pair is undervalued and find the idea to buy it at the current low price quite reasonable. As a result, buyers are getting more active than sellers, and the price makes a new low on the chart of the currency pair. Resistance level represents such high asset prices at which some market participants no longer want to buy, while others would be willing to sell. Buyers start thinking that buying this currency pair at current prices involves risk.
On the contrary, there is a growing desire to sell the financial instrument among sellers. As a result, the pressure of sellers becomes higher than that of buyers. The rise of prices gives way to their fall, which makes another price high on the currency pair chart. Various trading methods and algorithms help with this. Today, there is a large number of them, but not all are efficient. Time-proven strategies using support and resistance levels still show pretty good results.
The idea behind these strategies is to correctly plot the support or resistance levels that may affect the movement of a currency pair. As you can see, the underlying idea is simple and logical. But the hardest thing here is how to actually draw support and resistance levels correctly. We mean monthly, weekly, and daily timeframes. It is believed that support and resistance levels are more significant on these timeframes.
If you draw support or resistance levels on the H1 chart, the price will most likely take out this level easily on a daily timeframe. However, if you draw support or resistance levels on the daily timeframe, the price with a higher probability will bounce from this level on the H1 timeframe. Keep in mind that your goal is to spot significant levels, which can cause the price to bounce from them and create the potential for buying or selling.
There is a universal solution when it comes to this: if the price fails to break out some level more than once, the level may be considered as a significant one. If a certain level holds the price many times, it will most likely hold the price pressure back in the nearest future. There is a common mistake in technical analysis, namely, scrolling back through the time scale of the MT4 trading terminal too far. It is typical for traders who want to plot all possible levels on the currency pair chart.
But, as we have already said, this is not the best approach. In fact, the price rarely behaves in such a way that we can see clearly defined levels. More often, support and resistance happen to be blurry.
The Bounce
The level may touch the edges of almost all candlesticks, except for one or two. In some cases, it will inevitably pass through the middle of the shadow or even the body of a candlestick. It is acceptable when drawing support and resistance levels.
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You can see that the price has formed several resistance levels in the upper part of the graph. Similarly, you can determine three support levels that should be combined into a single support zone in the lower part of the chart. Support and resistance zones better reflect the real market situation. This matter is more of a personal preference. You may well use the levels while meaning the zones.
You can often see the situation when the price breaks out the level, tests it from the reverse side and bounces from it.
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As a result, support becomes resistance, and resistance becomes support. They call them mirror-like levels. The chart shows that the price is trading near the resistance level at 1.