The fundamental concepts of technical analysis are support and resistance levels. Technical analysis strategies are based on psychological and mathematical patterns from previous periods. One such pattern is resistance and support levels, which determine the most likely price direction change or confirmation of trend continuation.
They can be used by both new and experienced traders.
In this article, we will learn what support and resistance lines are, how to draw them correctly, and how to apply this knowledge to real-world trading.
Fundamental Concepts
You must first understand what support and resistance levels are before you can begin adding them to the chart. They are critical indicators of a collision between upwardly and downwardly oriented players, known as bulls and bears. Traders pushing prices up or down will eventually reach a point where the opposing group is equally opposed.
Support is the price level that "defends," or prevents, the price from falling lower. Resistance is the line that prevents the price from rising and thus resists its rise.
A resistance line can become a support line as a result of price fluctuations, and vice versa.
Support is defined as two or more lows, and resistance is defined as two or more highs.
Once the price reaches a point of extremum on the chart, you can begin outlining the line, and the second extremum allows you to completely draw the support or resistance line. Because extremes are rarely repeated, the line is roughly drawn in the middle of them if the difference between them is insignificant. If the price spread between the marked extrema is large, the price range between these points is marked for the line, and traders are guided by it when drawing lines.
In a sideways trend, determining resistance and support levels is easier. With large price changes, the possibility of defining support and resistance lines incorrectly is very high.
There can be both strong and weak opposition and support. The time frame and number of price touches on the line define the line's strength. The higher the time frame, the more touches there are, as well as the strength of the resistance or support line. The length of the time frame is more important than the number of touches.
In general, the support and resistance lines indicate areas where the probability of a price correction increases.
The Notion Of A Trend
One of the indicators used to calculate support and resistance levels is trend strength. A trend is a price movement up or down over a long time period. The price of an asset can fluctuate, but if its minimums are consistently going up, the trend is upward, if the maximums are going lower, the trend is downward. On the stock market, a visually identifiable trend is used to assess long-term investments and the likelihood of success of short-term speculation.
How to trade using trend? The following algorithm is used for this purpose.
The trend line is determined by the price of the asset.
The Ultimate Beginner’s Guide To Trend Trading
How the trend line behaves when it contacts the support and resistance lines is examined. If the uptrend line breaks out a strong resistance line at the second or third try, then there is a considerable probability of further price growth. Conversely, the price of an asset is more likely to move down if it breaks out a strong support level.
What Factors Affect Support and Resistance Levels
You should consider psychological and fundamental factors when drawing support and resistance lines. In general, the price cannot constantly rise or fall. After breaking out at significant levels of support and resistance, the likelihood of a psychological phenomenon known as "traders' remorse" increases as many players reconsider the future trend of asset price development. This happens as a result of the following factors:
Fundamental: market or security indicators do not provide a basis for further price movement;
Psychological: as prices rise and fall, people begin to doubt the validity of future moves.
Profit fixing: achieving certain price points gives players a reason to fix their profits by monitoring the situation's evolution.
If a large enough number of traders "repent" and close their positions, the price will return to the support or resistance level, and the trend will reverse.
Correct Levels of Support and Resistance
Surprisingly, there is no widely held consensus on how support and resistance lines should be named, nor are there any clear, specific descriptions of the relationship between extremums and lines. Nonetheless, the majority of traders believe that resistance and support levels are horizontal lines drawn at the highest and lowest price levels.
Resistance lines are drawn on the maximums of impulse movements during an uptrend, and supports are formed on the minimums of corrective movements. The next low overlaps the next maximum, converting the resistance level to a support level. On the downside, the previous high coincides with the previous low, and the support level becomes a resistance level.
Some traders believe that oblique support and resistance lines drawn through highs and lows are trend lines.
Support and resistance lines can also be drawn through supply-price pivot points, also known as TD-points, which are upper extrema surrounded by lower extrema. The maximum point is the one above which prices have not moved in a specific time period, and the minimum point is the one below which prices have not moved in a specific time period.
Over time, each trader determines for themselves the best way to draw support and resistance lines for their specific purposes. Some traders are limited to identifying lines that are close to circular values, that is, lines that end in zero.
Based on previously formed reversal levels, it is also used to determine resistance and support levels.It is expected that if the price has previously bounced from a certain level, it will do so again. In this case, the trader must carefully analyze price dynamics and draw the lines by hand.
Each method can correctly determine support and resistance levels or it can lead to errors; it all depends on the trader's skills.
How to Draw Levels of Support and Resistance:
Consider the fundamental principles of drawing support and resistance lines.
Finding at least two minimum (maximum) points for the support (resistance) line These points are frequently close to the significant round number of the traded asset. Such closeness can be explained by the work of trading algorithm authors and traders, who prefer to be guided by visual values.
The drawing of lines from these points into the future They can be horizontal, with a positive or negative slope, or both. There may be several such lines on a single chart.
an examination of the significance of the obtained lines of support and opposition.
The third step is the most important. It considers the received charts from the following positions:
The hourly line is more important than the minutely line, but it has less value when compared to the weekly line.
Length: the longer the resistance and support lines on the chart, the more important they are as a signal of a trend reversal or trend development for the trader.
A few finishing touches As the number of lows and highs on which the support and resistance lines are based grows, so does their credibility.
Trading volume: If asset price areas of contact with support or resistance lines are accompanied by increased trading activity, it indicates that the lines are viewed as indicators by many traders.
Only after analyzing the lines' significance in relation to the aforementioned points can you begin using them in trading strategies.
How to Use Resistance and Support Levels in Live Trading
There are numerous approaches to working with support and resistance lines. Even though there is a wealth of educational material available on the Internet, learning how to use support and resistance lines requires practice.
To begin with, it is trading on a pullback and a breakout. This method assumes that if the price encounters significant support or resistance, it will most likely reverse. If the trend is strong, the price can cross any level and continue to rise. This strategy entails only placing orders in the direction of the current trend.
Trading on support and resistance levels is possible in a horizontal price channel. In this case, trades are opened when the price approaches the upper boundary of the channel, with the expectation of a resistance line crossing or a price rebound and fall. Price support and resistance lines, rather than price points, are taken into account to a greater extent. Which trend will prevail must be determined by auxiliary tools on the chart, such as bar and candlestick behavior.
Not all levels of opposition and support are equally strong. A level's "strength" refers to the accuracy of its signal: a breakout indicates the continuation of a strong trend, whereas a reversal indicates the start of a new movement in the opposite direction. In the market, false breakouts are common. Use the recommendations below to avoid them.
Step 1: Keep an eye on the time frames.
Look for extremes on a daily and weekly basis. They can be considered strong if they at least partially coincide with extrema in lower time frames. Market makers are frequently active in the M5-M15 time frame. The approximate accumulation zone for stop orders can be determined using the depth of the market and the logic of private traders. With large volumes and trigger stops, market makers pull the price to the required zone, obtaining an asset at the best price.
Step 2: Count the number of touches.
The finer the level touches, the better. Note that the line must be drawn on exact touches without "pulling wishful thinking."
Support And Resistance Levels In Forex Trading
In the forex market, strategies based on support and resistance lines may be considered basic. In particular, trading within the price corridor is applied in case of price bounces - buying on a bounce from the upper boundary and buying on the approach to the lower one. In this case, stop orders are set either above or below the boundaries.
Trading along the lines is useful in distinctly determined trends. For instance, if you are in a downtrend, you should monitor the upward correction to the previous support level and the new resistance level. If we talk about uptrend, the correction to the previous resistance and the new support should be monitored.
Still, breakout trading is one of the most popular strategies in the forex market. It requires defining support and resistance levels as precisely as possible. In this strategy pending orders are placed just above or just below resistance levels.
Summary
Support and resistance levels are essential when analyzing any chart, either currency pair or cryptocurrencies. The major problem in doing so is knowing how to identify levels and place lines correctly. This is a practical skill, as there is no unambiguous definition of how to determine the support and resistance lines accurately. The task of defining them can become easier due to the fact that there are numerous auxiliary tools on trading platforms to determine them. Many trading strategies are based on support and resistance lines, and their effectiveness, by the way, also depends on the trader's practical skills.
By understanding the principles of levels application, you can not only improve your trading system but also learn to understand the market better and assess its prospects.
They can be used by both new and experienced traders.
In this article, we will learn what support and resistance lines are, how to draw them correctly, and how to apply this knowledge to real-world trading.
Fundamental Concepts
You must first understand what support and resistance levels are before you can begin adding them to the chart. They are critical indicators of a collision between upwardly and downwardly oriented players, known as bulls and bears. Traders pushing prices up or down will eventually reach a point where the opposing group is equally opposed.
Support is the price level that "defends," or prevents, the price from falling lower. Resistance is the line that prevents the price from rising and thus resists its rise.
A resistance line can become a support line as a result of price fluctuations, and vice versa.
Support is defined as two or more lows, and resistance is defined as two or more highs.
Once the price reaches a point of extremum on the chart, you can begin outlining the line, and the second extremum allows you to completely draw the support or resistance line. Because extremes are rarely repeated, the line is roughly drawn in the middle of them if the difference between them is insignificant. If the price spread between the marked extrema is large, the price range between these points is marked for the line, and traders are guided by it when drawing lines.
In a sideways trend, determining resistance and support levels is easier. With large price changes, the possibility of defining support and resistance lines incorrectly is very high.
There can be both strong and weak opposition and support. The time frame and number of price touches on the line define the line's strength. The higher the time frame, the more touches there are, as well as the strength of the resistance or support line. The length of the time frame is more important than the number of touches.
In general, the support and resistance lines indicate areas where the probability of a price correction increases.
The Notion Of A Trend
One of the indicators used to calculate support and resistance levels is trend strength. A trend is a price movement up or down over a long time period. The price of an asset can fluctuate, but if its minimums are consistently going up, the trend is upward, if the maximums are going lower, the trend is downward. On the stock market, a visually identifiable trend is used to assess long-term investments and the likelihood of success of short-term speculation.
How to trade using trend? The following algorithm is used for this purpose.
The trend line is determined by the price of the asset.
The Ultimate Beginner’s Guide To Trend Trading
How the trend line behaves when it contacts the support and resistance lines is examined. If the uptrend line breaks out a strong resistance line at the second or third try, then there is a considerable probability of further price growth. Conversely, the price of an asset is more likely to move down if it breaks out a strong support level.
What Factors Affect Support and Resistance Levels
You should consider psychological and fundamental factors when drawing support and resistance lines. In general, the price cannot constantly rise or fall. After breaking out at significant levels of support and resistance, the likelihood of a psychological phenomenon known as "traders' remorse" increases as many players reconsider the future trend of asset price development. This happens as a result of the following factors:
Fundamental: market or security indicators do not provide a basis for further price movement;
Psychological: as prices rise and fall, people begin to doubt the validity of future moves.
Profit fixing: achieving certain price points gives players a reason to fix their profits by monitoring the situation's evolution.
If a large enough number of traders "repent" and close their positions, the price will return to the support or resistance level, and the trend will reverse.
Correct Levels of Support and Resistance
Surprisingly, there is no widely held consensus on how support and resistance lines should be named, nor are there any clear, specific descriptions of the relationship between extremums and lines. Nonetheless, the majority of traders believe that resistance and support levels are horizontal lines drawn at the highest and lowest price levels.
Resistance lines are drawn on the maximums of impulse movements during an uptrend, and supports are formed on the minimums of corrective movements. The next low overlaps the next maximum, converting the resistance level to a support level. On the downside, the previous high coincides with the previous low, and the support level becomes a resistance level.
Some traders believe that oblique support and resistance lines drawn through highs and lows are trend lines.
Support and resistance lines can also be drawn through supply-price pivot points, also known as TD-points, which are upper extrema surrounded by lower extrema. The maximum point is the one above which prices have not moved in a specific time period, and the minimum point is the one below which prices have not moved in a specific time period.
Over time, each trader determines for themselves the best way to draw support and resistance lines for their specific purposes. Some traders are limited to identifying lines that are close to circular values, that is, lines that end in zero.
Based on previously formed reversal levels, it is also used to determine resistance and support levels.It is expected that if the price has previously bounced from a certain level, it will do so again. In this case, the trader must carefully analyze price dynamics and draw the lines by hand.
Each method can correctly determine support and resistance levels or it can lead to errors; it all depends on the trader's skills.
How to Draw Levels of Support and Resistance:
Consider the fundamental principles of drawing support and resistance lines.
Finding at least two minimum (maximum) points for the support (resistance) line These points are frequently close to the significant round number of the traded asset. Such closeness can be explained by the work of trading algorithm authors and traders, who prefer to be guided by visual values.
The drawing of lines from these points into the future They can be horizontal, with a positive or negative slope, or both. There may be several such lines on a single chart.
an examination of the significance of the obtained lines of support and opposition.
The third step is the most important. It considers the received charts from the following positions:
The hourly line is more important than the minutely line, but it has less value when compared to the weekly line.
Length: the longer the resistance and support lines on the chart, the more important they are as a signal of a trend reversal or trend development for the trader.
A few finishing touches As the number of lows and highs on which the support and resistance lines are based grows, so does their credibility.
Trading volume: If asset price areas of contact with support or resistance lines are accompanied by increased trading activity, it indicates that the lines are viewed as indicators by many traders.
Only after analyzing the lines' significance in relation to the aforementioned points can you begin using them in trading strategies.
How to Use Resistance and Support Levels in Live Trading
There are numerous approaches to working with support and resistance lines. Even though there is a wealth of educational material available on the Internet, learning how to use support and resistance lines requires practice.
To begin with, it is trading on a pullback and a breakout. This method assumes that if the price encounters significant support or resistance, it will most likely reverse. If the trend is strong, the price can cross any level and continue to rise. This strategy entails only placing orders in the direction of the current trend.
Trading on support and resistance levels is possible in a horizontal price channel. In this case, trades are opened when the price approaches the upper boundary of the channel, with the expectation of a resistance line crossing or a price rebound and fall. Price support and resistance lines, rather than price points, are taken into account to a greater extent. Which trend will prevail must be determined by auxiliary tools on the chart, such as bar and candlestick behavior.
Not all levels of opposition and support are equally strong. A level's "strength" refers to the accuracy of its signal: a breakout indicates the continuation of a strong trend, whereas a reversal indicates the start of a new movement in the opposite direction. In the market, false breakouts are common. Use the recommendations below to avoid them.
Step 1: Keep an eye on the time frames.
Look for extremes on a daily and weekly basis. They can be considered strong if they at least partially coincide with extrema in lower time frames. Market makers are frequently active in the M5-M15 time frame. The approximate accumulation zone for stop orders can be determined using the depth of the market and the logic of private traders. With large volumes and trigger stops, market makers pull the price to the required zone, obtaining an asset at the best price.
Step 2: Count the number of touches.
The finer the level touches, the better. Note that the line must be drawn on exact touches without "pulling wishful thinking."
Support And Resistance Levels In Forex Trading
In the forex market, strategies based on support and resistance lines may be considered basic. In particular, trading within the price corridor is applied in case of price bounces - buying on a bounce from the upper boundary and buying on the approach to the lower one. In this case, stop orders are set either above or below the boundaries.
Trading along the lines is useful in distinctly determined trends. For instance, if you are in a downtrend, you should monitor the upward correction to the previous support level and the new resistance level. If we talk about uptrend, the correction to the previous resistance and the new support should be monitored.
Still, breakout trading is one of the most popular strategies in the forex market. It requires defining support and resistance levels as precisely as possible. In this strategy pending orders are placed just above or just below resistance levels.
Summary
Support and resistance levels are essential when analyzing any chart, either currency pair or cryptocurrencies. The major problem in doing so is knowing how to identify levels and place lines correctly. This is a practical skill, as there is no unambiguous definition of how to determine the support and resistance lines accurately. The task of defining them can become easier due to the fact that there are numerous auxiliary tools on trading platforms to determine them. Many trading strategies are based on support and resistance lines, and their effectiveness, by the way, also depends on the trader's practical skills.
By understanding the principles of levels application, you can not only improve your trading system but also learn to understand the market better and assess its prospects.
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🔥 UP to 4000$ BONUS: forexn1.com/broker/
🇺🇸 US ZERO SPREAD BROKER: forexn1.com/usa/
🟪 Instagram: www.instagram.com/forexn1_com/
