Support and resistance levels are important concepts in the foreign exchange market, the awareness of which not only allows you to see graphical figures, but also helps in determining the trend. Assessing the strength of these levels becomes a significant basis for predicting a trend and for determining the point of its reversal.
What is the level of support?
The level of support, support, or Support is a price indicator; within it, strong buy positions are collected that can not only stop the downtrend, but also turn it in the opposite direction. When the falling trend reaches support, it is like a diver who, pushing to the bottom, pushes away from him. The level on the chart has a horizontal position. Levels are formed if horizontal lines are drawn through price consolidation areas. The line is lower than the price and will be support, it is there that sellers can not overpower buyers. Quite often it happens that the levels of support and resistance change places, because the definition of support as a level becomes relevant for resistance. The strength of the levels increases as prices break away from them.
What is the resistance level?
The resistance level , resistance, or Resistance is a price indicator, on the basis of which a sufficiently large number of sell positions are concentrated. They are enough not only to stop the uptrend, but also to reverse it. As soon as the price reaches resistance, it fights off it and turns around in the opposite direction. Resistance can be either horizontal or almost horizontal. It is most effective to build support and resistance levels in the extreme parts of the areas of consolidation, or Congestion Zones. Using the maximum and minimum price indicators for this purpose is not very effective. The outskirts of the consolidation zones make it clear where strong market participants have changed their minds. Local minima and maxima are just a panic of small trading participants. A strong level of resistance, in fact, as well as support, becomes the cause of a trend reversal. Weak levels only pause the trend. In most situations, traders sell assets if prices reach resistance and buy them when prices encounter support.
What forms the levels?
Before determining the levels of support and resistance, you need to understand that these are the price indicators at which the majority of purchases or sales in history were made. Traders, remembering the highs and lows, when they are again reached by the market, again without hesitation, open positions for buying or selling. These are peculiar key moments that have shown themselves well in history. In the hope of obtaining guaranteed profit, all participants expect a certain price value, from which a strong movement was previously observed. We can say that the development of lines depends to a greater extent on the participants in the trade themselves and on the actions that they perform within a certain range.
Level Definition
Support and resistance levels are key areas where there is a balance between buyers and sellers, where supply and demand forces are balanced. In the financial market, with an increase in supply, a falling trend is formed, and with an increase in demand, a growing trend is formed. In a balanced format of supply and demand, you can observe a side trend, price movement in a particular price channel. Support will be located in the area where demand for a trading asset is formed, preventing its price from dropping. From a logical point of view, the phenomenon is explained very simply. As soon as the price drops to a certain level, buyers have an interest in buying. At the same time, sellers are running out of power in order to move the price down.
The opposite is true for resistance. If you look at the technical side of the issue, then the support and resistance levels for each day are places where the largest number of buy and sell orders are concentrated, which work and immediately correct the movement. We can say that support and resistance are lines that connect the same highs and lows at a price.
Trading range
There are situations when the construction of support and resistance levels must be carried out simultaneously, since they are formed in parallel, creating a certain trading range, or Trading Range. It is also known as a consolidation zone. In technical analysis, the phenomenon is known as a specific figure - a rectangle that indicates a continuation of the trend. There is a high probability that prices will be fixed in this range for a rather long time. This is due to the high concentration of buy and sell orders at the corridor borders. The exit of the asset price beyond the corridor is a very significant signal for the trader.
When the price is assigned to the support line, a strong downtrend begins. When consolidation occurs above the resistance level, then it is time to follow the upward trend. The correct determination of support and resistance levels in tandem with other signals, such as an increase in volume or the formation of a gap, makes it possible to jump into a trend at the very beginning.
The flow of support into resistance and vice versa
One of the basic rules of technical analysis suggests that after breaking through the resistance level, the latter turns into support, and when breaking through support, it becomes resistance. The breaking through of resistance indicates the formation of a large demand for a particular trading instrument in the market, which is reflected in the form of price increases. It is highly likely that when the price drops back to this level, buyers will activate and will push the chart up again.
When the support line is broken, the situation is the opposite. Supply exceeds demand, which leads to a drop in prices. When the price reaches the broken level, sellers will again begin to act actively. This pattern of behavior of trading assets is known as retest level. It is often used in trading strategies. Trading from support and resistance levels in this format is attractive with minimal risks and fairly high profits.
Zone Definition
It is important to pay attention to the fact that technical analysis does not belong to the category of exact sciences. The final decision of most traders is made on the basis of subjective judgments and assumptions. Moreover, in practice, maxima and minima identical in height are quite rare. That is why traders learn not only how to determine support and resistance levels, but also work with such a concept as zones, which can be called price reversal ranges. The use of zones and levels is determined by each specific situation. Experts recommend working with horizontals if prices go in a narrow range for no more than two months. Level zones are relevant where a wide range of movements
Indicators
Support and resistance need not be built independently. There are many technical analysis tools that can do this job instead of a trader. For MT4 and MT5 terminals, there are a huge number of tools that independently draw support and resistance levels for each asset. The forex indicator that works with mono levels can be found in the public domain on the Internet, and it is activated by installing it in the terminal.
When working with these applications, it is worth remembering that levels never make predictions, they are formed on the basis of history. Thus, there is an equal probability of both southern and northern price movement. The use of auxiliary signals, such as volumes, COT reports, information on transactions in the spot market and others, will help determine the direction.
Most popular level indicators
A huge number of indicators are presented on the Internet, it is worth getting acquainted with the most popular of them:
- ACD is engaged in the automatic construction of levels based on the formed price channel. The indicator gives a clear understanding of the trend and market conditions.
- Countback line is engaged in the construction of lines in two colors: blue and red. The calculations are based on price graphic highs and lows.
- Distributive Pricing works great on the H1 timeframe. The indicator draws the readings of the price impulse in the format of two red lines, which give signals to enter the market.
- Grid Builder is building psychological levels. More often the price bounces off the lines of indicators, much less often breaks them.
The main drawback of such indicators is that when the trading time interval changes, the levels are completely redrawn.
How to determine how strong a level is?
A trading strategy at the support and resistance levels is based on an analysis of the strength of those very levels. According to one of the Forex classics Murphy, the level will be the stronger, the longer the prices fluctuated in its range. Strength increases as volumes increase and as levels continue to be used. Elder views the level as strong or weak, depending on how many times the price has touched it. Opinions of well-known traders also differ in the aspect of building levels. Thomas Demark talks about building levels from reference points, but Schwager is guided by the construction of contours by highs and lows. It is widely believed among classics that it is not enough to know how to build support and resistance levels. You need to work with key areas, areas near levels. Despite the divergence of opinions, each of the theorists is a successful participant in trading in the market.
conclusions
Trading from support and resistance levels without using auxiliary tools, even if the lines are flawlessly built, will not bring a positive result. Levels are just price values from which a strong movement is expected. The probability of price movement up or down has a ratio of 50/50. Without auxiliary tools, trading turns into roulette. It should be borne in mind that it is precisely the support and resistance lines that underlie the many profitable trading strategies.