Support and Resistance Levels

A modern trader’s computer is capable of conducting technical analysis of any complexity using special software. Not surprisingly, support and resistance levels and their value as technical tools are lost in the shadow of numerous indicators with difficult-to-remember names. However, support and resistance levels remain one of the most basic and necessary components of technical analysis. 

Understanding Support and Resistance Levels in Forex Trading

Support and resistance levels are crucial price areas where trading activity spikes due to strong buying or selling pressure, counteracting the prevailing trend. When the support line signals increased buying interest (bulls), the resistance line indicates heightened selling pressure (bears), often pushing the market lower. Identifying these areas in advance significantly reduces trading risks and enhances profit potential.

Importance of Time Frames in Support and Resistance

Support and resistance levels vary across different time frames. Short-term traders, like floor traders, arbitrageurs, and day traders, focus on intraday levels for market entry and exit. In contrast, long-term investors use higher time frames to add positions or set stops. The accumulation of stop orders at these levels often triggers significant market reversals and increased volatility.

Methods to Determine Support and Resistance Levels

1. Previous Highs and Lows:
   • The simplest and often strong support level is the previous high in an uptrend. For example, if the market moves from point B to C, the previous high at point A becomes a support level upon a downward correction from C. This indicates a strong uptrend if the market respects this support.
2. Trend Lines:
   • Drawing trend lines along extreme points (highs and lows) on a chart helps identify support and resistance zones. In an uptrend, the line connecting higher lows acts as support. When this line is breached, it often transforms into a resistance level, signaling a potential trend reversal.
3. Moving Averages (MA):
   • Popular MAs like the 5-day, 10-day, 20-day, and 50-day are used to determine support and resistance. A break below a 50-day MA, for example, can signal a trend reversal. It’s advisable to wait for confirmation over two trading sessions before concluding a genuine breakout.
4. Pivot Points:
   • Floor traders often use pivot points to calculate potential support and resistance levels:
     • Pivot Point (PP) = (High + Low + Close) / 3
     • First Resistance (R1) = (PP x 2) – Previous Low
     • First Support (S1) = (PP x 2) – Previous High
     • Second Resistance (R2) = PP + (Previous High – Previous Low)
     • Second Support (S2) = PP – (Previous High – Previous Low)

Market Reactions and Trading Strategies

Traders use these levels as barometers to measure trend strength. If the market respects a support level and bounces, it confirms the trend’s strength. Conversely, failing to hold a resistance level may indicate a trend change. For instance, if a trader buys gold at $350 and sells at $400 (a resistance level), and the price then retraces to $380 before surging to $425, the former resistance ($400) becomes a new support level. This shift confirms the uptrend’s continuation.

Retracement Levels and Fibonacci

Technical analysts often use retracement levels to predict support and resistance. The common 50% retracement level indicates that a market typically corrects about half of its previous move before resuming the original trend. Other significant levels include one-third (33%) and two-thirds (66%), aligning with key Fibonacci numbers (38.2% and 61.8%). Corrections beyond two-thirds signal potential trend shifts.

Conclusion

Accurately identifying support and resistance levels is vital for maximizing profits and minimizing losses in Forex trading. By combining various methods to pinpoint these critical zones, traders can better predict market turning points and make informed trading decisions. Consistently tracking these levels on your charts will enhance your trading strategy and improve overall market analysis.

Example of MQL code

#property indicator_chart_window
#property indicator_buffers 2
#property indicator_color1 Red
#property indicator_color2 Blue

//---- buffers
double v1[];
double v2[];
double val1;
double val2;
int i;
  
int init()
  {

  IndicatorBuffers(2);
 
//---- drawing settings
 SetIndexArrow(0, 119);
 SetIndexArrow(1, 119);
  
   SetIndexStyle(0,DRAW_ARROW,STYLE_DOT,1,Red);
   SetIndexDrawBegin(0,i-1);
   SetIndexBuffer(0, v1);
   SetIndexLabel(0,"Resistance");
    

   SetIndexStyle(1,DRAW_ARROW,STYLE_DOT,1,Blue);
   SetIndexDrawBegin(1,i-1);
   SetIndexBuffer(1, v2);
   SetIndexLabel(1,"Support");
 
   return(0);
  }

int start()
  {
  
   i=Bars;
   while(i>=0)
     {
   
val1 = iFractals(NULL, 0, MODE_UPPER,i);
 if (val1 > 0) 
   v1[i]=High[i];
    else
      v1[i] = v1[i+1];
  
val2 = iFractals(NULL, 0, MODE_LOWER,i);
 if (val2 > 0) 
   v2[i]=Low[i];
      else
      v2[i] = v2[i+1];

      i--;
     }   
   return(0);
  }
 

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