What is Support and Resistance?

These are points that predict trend reversal or continuation at the level of a given point. The support level is below the current price, while the resistance level is above.

Support and resistance levels are used in technical analysis, which is considered one of the basic concepts present in financial markets. It is used primarily to study the behavior of the price in the past, in order to predict what is expected to happen in the future.

Its great advantage is that it can be applied to any time frame, which means that it can be used for any type of speculation – from a few seconds of scalping, all the way to several months of position trading.

Support and resistance are among the most important price formations, respected by the market. These are levels that usually inform about the moment, at which the price turns back and takes a direction opposite to the recent trend.

What is support?

This is a level that is below the price, from which the price bounces and takes a higher value. The more often a support zone is respected, the stronger it will become in the future. At the same time, quickly negated support and resistance levels lose their properties becoming a counter formation – then the support zone becomes a resistance zone.

What is resistance?

The resistance line is far less dynamic and much more frequent so-called false breakthroughs. This is caused primarily by the emotions that drive speculators – it is always fear that wins out over greed, that is, a drop in value over the need for increases.

Support and resistance, and the forex market

Forex support and resistance levels are shaped somewhat differently than in regulated markets – primarily the stock market. This is because on it we can observe a great many analytical examples that indicate how exactly stock markets react to key price levels. On the forex market, on the other hand, support and resistance lines are very often “torn apart” as a result of the price fluctuating intensely in their immediate vicinity.

In Forex, on the other hand, we can find a relationship that will significantly increase the effectiveness of playing support and resistance. For this purpose, we can use, for example, the MT4 platform, which allows us to effectively use resistance on many different time frames. By strategically determining support and resistance Forex levels, it will be possible to create strong and significantly respected support and resistance levels.

How do I determine support and resistance levels?

To determine these levels, we primarily use instruments such as candlestick formations, moving averages, trend lines, bollinger bands, Fibonacci elimination, and previous peaks and lows.

Having a base for determining support and resistance levels raises further questions – should we determine the right value by bottoms, peaks or perhaps wicks? There is no clear answer to this question. Determination of support and resistance levels should be based on specialized software and access to the so-called order book, which are provided most often by stock and futures brokers.

Candlestick data allows you to acquire the necessary information about the highest volume in a given period. Resistance and support determined are determined by the two peaks and lows, which contain the highest volume, will be strong and respected levels in the future.

How do you draw support and resistance line levels?

First of all, it is important to remember not to write all the perceived formations on the chart, as this will make it unreadable. The basis for drawing levels of support and resistance lines is the ability to decide which ones are important.

In addition, it is very important not to rely solely on the highest and lowest values of the candles that symbolize the price. This is because it happens that support and resistance are overwhelmingly ranges, zones, than exact levels. Therefore, the key level may be one of the values from the vertical axis of the price, or the intersection point of the wicks or even the body of the candles.

One last important thing – you don’t always have to go significantly backwards. In most cases, going back further than 8 months does not give good results. Usually the optimum is from 3 to 6 last months. In the case of a chart with a daily interval by deciding to draw levels, that go back several years you will usually lose time.

Automatic methods for determining support and resistance levels

In the market we can find automatic methods for determining support and resistance levels. Of these, two stand out clearly:

• Pivot Points – methods of determining price reversal points, based on calculated levels, synthesized from the price levels reached in the last session (opening, closing, highest, lowest price). They work on a similar principle as support and resistance levels, but not based on past trader behavior(Price Action). You can use our Pivot Points calculator for calculations.

• Fibo slopes – are artificially determined levels that are not confirmed by the actual behavior of the market in the past. The model is based on Elliott wave theory, which deals with the cyclical nature of market behavior and its specific fractal nature. Here – as in the case of the ocean – large waves are made up of smaller ones.

Some traders treat Fibo ellipses as another pattern, reflecting movements of support and resistance. However, they do not have as strong a reputation as the classic ways of determining resistance and support zones.

So is it worth using support and resistance levels?

Definitely yes, given that these are the basic and easiest to identify technical analysis formations. Most forex charts have many indicators, allowing you to see these levels and use them to your advantage.