Rules for determining Potential Support and resistance.
1. Swing points: Previous highs and lows
These points are intelligent points where one would expect support and resistance. They are high probability points because sellers and buyers made decisions on these points in the past and it is more likely that when price gets there again, due to people’s psychology being constant, they would tend to act on these points. Buyers who bought at the lows have a tendency to take profits at the highs, and vice versa for sellers to take profits at the lows. Sometimes though, price will not respect these zones and would just break through them. That is why they are pointers or intelligent places to expect support and resistance to be.
2. At round numbers:
Support and resistance often form at round numbers because these serve as psychological points on which traders base their decisions. They are often referred to as psychological levels and market orders used to be formed around these numbers. It is the human tendency when talking about numbers, to gravitate towards round numbers and this is no different for the forex market. For most of these numbers, price would tend to end in two, three or four zeros like 1.3200, 109.00, 110.00, and 1.0000.
3. Trendlines and moving averages.
These are dynamic levels of support and resistance. I usually use trendlines and avoid moving averages although many price action traders use moving averages. The number of times a trendline has been touched, the more reliable it will be. That is a rule in trendlines. To draw a valid trendline though, it has to touch at least two swing highs for a downtrend, or two swing lows for an uptrend. You buy or sell at these points again if price touches them another time.
4. Gaps
Gaps represent emotional points on charts. They are formed when there is a substantial difference between the closing price of the previous candlestick and the opening price of the next candlestick. They are formed when there is a strong shift in sentiment about the market, and usually due to fundamental news. Gaps can occur over the weekend or intraday. Weekend gaps are more common than intraday gaps. It is noticed that the market tends to fill the gaps that were formed, and when these happens, the gaps tend to act as support and resistance levels.
5. Fibonacci levels
To every action, there is a reaction. So when price moves upwards, it usually has a correction. The same goes for price move downwards. When these corrections happen, the Fibonacci retracement tool can be used to measure where this will end for the underlying trend to continue. This tool was taken from the famous Fibonacci sequence of numbers such as 1,1,2,3,5,8,13,21,34,…. If any number in the sequence is divided by its successor, what you get is a ratio, 0.618, which is called the golden ratio. The golden ratio appears widely in nature and market participants believe that this golden ratio can be used to measure how much price will make a correction or counter trend before returning to the dominant trend. The levels are defined as percentages and many price action traders believe that the 61.8% and 50% fib retracement levels are very significant, although other levels are also important.
These points are intelligent points where one would expect support and resistance. They are high probability points because sellers and buyers made decisions on these points in the past and it is more likely that when price gets there again, due to people’s psychology being constant, they would tend to act on these points. Buyers who bought at the lows have a tendency to take profits at the highs, and vice versa for sellers to take profits at the lows. Sometimes though, price will not respect these zones and would just break through them. That is why they are pointers or intelligent places to expect support and resistance to be.
2. At round numbers:
Support and resistance often form at round numbers because these serve as psychological points on which traders base their decisions. They are often referred to as psychological levels and market orders used to be formed around these numbers. It is the human tendency when talking about numbers, to gravitate towards round numbers and this is no different for the forex market. For most of these numbers, price would tend to end in two, three or four zeros like 1.3200, 109.00, 110.00, and 1.0000.
3. Trendlines and moving averages.
These are dynamic levels of support and resistance. I usually use trendlines and avoid moving averages although many price action traders use moving averages. The number of times a trendline has been touched, the more reliable it will be. That is a rule in trendlines. To draw a valid trendline though, it has to touch at least two swing highs for a downtrend, or two swing lows for an uptrend. You buy or sell at these points again if price touches them another time.
4. Gaps
Gaps represent emotional points on charts. They are formed when there is a substantial difference between the closing price of the previous candlestick and the opening price of the next candlestick. They are formed when there is a strong shift in sentiment about the market, and usually due to fundamental news. Gaps can occur over the weekend or intraday. Weekend gaps are more common than intraday gaps. It is noticed that the market tends to fill the gaps that were formed, and when these happens, the gaps tend to act as support and resistance levels.
5. Fibonacci levels
To every action, there is a reaction. So when price moves upwards, it usually has a correction. The same goes for price move downwards. When these corrections happen, the Fibonacci retracement tool can be used to measure where this will end for the underlying trend to continue. This tool was taken from the famous Fibonacci sequence of numbers such as 1,1,2,3,5,8,13,21,34,…. If any number in the sequence is divided by its successor, what you get is a ratio, 0.618, which is called the golden ratio. The golden ratio appears widely in nature and market participants believe that this golden ratio can be used to measure how much price will make a correction or counter trend before returning to the dominant trend. The levels are defined as percentages and many price action traders believe that the 61.8% and 50% fib retracement levels are very significant, although other levels are also important.
