Support and Resistance Levels

Description

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. 

Support and resistance levels are price areas where trading activity increases sharply and where there is strong buying or selling pressure, opposite to the previously outlined trend. If the support line signals an increase in the open interest of the bulls, then the resistance line strengthens the position of the players for a fall and pushes the market lower. A trader who pre-determines these areas reduces the risk of losses to a large extent. In addition, by choosing price areas of support and resistance levels as the entry point to the market, the trader thereby greatly increases his chances of making a profit. Support and resistance levels have their time frames. The reaction of the market to the passage of these levels is a kind of barometer for measuring the strength of the main trend. Traders who try to keep a fairly tight time frame, such as floor traders, arbitrageurs, and individual day traders, often rely heavily on intraday levels to enter and exit the market. Investor traders target higher time frames, which they use more to enter additional positions or place stops. The accumulation of a huge number of stop orders at support and resistance levels very often leads to a very strong reversal and an increase in market volatility dozens of times. 

There are several ways to determine support and resistance levels, each of which is limited by its time frame, in which some levels will prevail in importance over others. The support level formed by the last high of an uptrend (Fig. 1) can be considered the simplest in definition and probably quite strong. After the market makes another jump to a new high (from B to C), the previous high (A) will automatically turn into a good support level if, of course, it sustains a downward correction from C. If all criteria are met, then the uptrend is really strong. Correction in these cases is inevitable, and therefore, you should always be ready for it. The market often falls on the main trend. And don’t be surprised. 

The simplest example might look like this. A trader buys gold at $350 and sells at $400, as if at a resistance level. Then the market rolls back to $380 and goes sharply to $425. However, the trader here does not go long down to play on the pullback. He is waiting for the price of $400 to buy up. The former resistance level has turned into a support level. So, the secret is how the market reacts in the area of ​​the resistance level, which may soon turn out to be a good support. If an uptrend really prevails in the market, then the price will jump sharply from the support level, determined by the increase in the volume of transactions and open interest. Open interest, in this case, is like fuel to maintain an uptrend. He says that an increasing number of buyers interested in further growth appear on the market. As soon as the market turns up from the support level, you can forget about it for a while. There, a new resistance level enters the scene in the form of the last high (C). In this case, a further confirmation of the uptrend will be:
– holding the support level (D), reinforced by the level of point A;
– breaking through the resistance level C. 
If the above conditions are met, the resistance level C will turn into a support level. The inability of the market to hold the resistance level (C-F) is often the first warning of a possible change in the direction of the trend. A further drop below the DG support once again confirms the possibility of a shift in market sentiment. This is at worst, and at best, it can be seen as a pause before new growth. 

The downtrend will be carried out according to the same principles, except for the influence of open interest. Open interest may increase only slightly or remain at the same level, either at the very beginning of the decline or throughout the entire phase of the decline to a new low. In principle, this is explained quite simply. People prefer to hold a long position (in this case). Intraday highs/lows can also be considered levels, although less significant. The thing is that their specialization is short-term. And the longer they stand the test of time, the more likely they are to impact the market. By drawing horizontal lines along the extreme points, it is possible, with a certain degree of probability, to determine the support and resistance zones for the near future (Fig. 2). See how many highs, lows, and closes have been recorded and at what levels over the past few weeks. Mark those price levels in which the largest number of extremums and closures was recorded. Most likely, these levels will work. 

Another way to determine support and resistance levels is to use trend lines. If the price of the traded instrument is in the process of growth, then the market draws zigzags on the chart, where each subsequent maximum / minimum point is higher than the previous maximum/minimum points. The upward line drawn at the extreme points of the chart will be the support line (Fig. 3). As the area of ​​the support line is reached, the demand for the traded instrument increases in the market, thereby spurring the market even higher. But if the price falls below the support line, it means that the market has no problem meeting the buyers’ demand. This moment is a clear signal of a change in the balance of supply and demand. A trend reversal is coming. Often, former support lines continue to “work” for several weeks and even months after they were “broken”, but now as secondary resistance lines. After the price breaks the support line of an uptrend and goes below it, the market often makes a so-called “take-off” when, during the next upward push, the price touches the former support line, but now from its lower side, so this line is currently acting as a resistance level. The area around this line now provides a good opportunity to initiate a short position, as the next most likely market move would be to build a long exit down. As the price breaks the support line of an uptrend and goes below it, the market often makes a so-called “take-off” when, during the next upswing, the price touches the former support line, but now from its lower side, so this line now acts as a resistance level. The area around this line now provides a good opportunity to initiate a short position, as the next most likely market move would be to build a long exit down. As the price breaks the support line of an uptrend and goes below it, the market often makes a so-called “take-off” when, during the next upswing, the price touches the former support line, but now from its lower side, so this line now acts as a resistance level. The area around this line now provides a good opportunity to initiate a short position, as the next most likely market move would be to build a long exit down. 
Conclusion: Your charts should show not only trend lines that emphasize the nature of current price patterns but also the main support and resistance lines of the trend that have remained in the past, as they will be relevant for a long time to come. 

The lines of some popular indicators, such as the Moving Average, calculated on the most popular periods among traders (5-, 10-, 20-, and 50-day MA) are also used to determine support and resistance levels. The longer the period taken to calculate the MA, the greater the significance of the support/resistance level formed by its line. For example, a break of the 5-day MA means a price reversal on a minor (weekly) time frame, while a break of the 50-day MA can mean a reversal of the main trend. If the price of an instrument is above the 50-day MA line, this indicates that there is a significant inflow of capital into this market. Money drives the price up. If the price is below the 50-day MA, it means that money is leaving the market and long positions are being liquidated. I always wait for an instrument to fully trade above or below the MA (depending on whether it served as a support or resistance level) and stay there for 2 trading sessions before concluding that the level of support/resistance is really broken. The market tends to trade for several days on both sides of the MA before deciding which direction to take. As soon as the MA is broken in one direction or another, I use an indicator such as Momentum (Figure 4) to confirm the breakout. That this support/resistance level has indeed been broken. The market tends to trade for several days on both sides of the MA before deciding which direction to take. As soon as the MA is broken in one direction or another, I use an indicator such as Momentum (Figure 4) to confirm the breakout. That this support/resistance level has indeed been broken. The market tends to trade for several days on both sides of the MA before deciding which direction to take. As soon as the MA is broken in one direction or another, I use an indicator such as Momentum (Figure 4) to confirm the breakout. I note that the Moving Average line, in this case, should not be used as an exact level to initialize a new or close an old position

Sometimes, it can be quite difficult to determine support and resistance levels, especially when the market moves into a new area for itself (regardless of whether it is up or down). However, there are simple formulas that allow you to calculate where these levels should be if you have no other means at your disposal. This method, sometimes referred to as “pivot points analysis”, is very commonly used by traders on the floor of the Chicago stock exchanges. 
(High + Low + Close) / 3 = turning point (PT) 
(Fri x 2) – yesterday’s Low = first resistance level 
(Fri x 2) – yesterday’s High = first support level 
FR – (yesterday’s daily price range) = second support level 
FR + (yesterday’s daily price range) = second resistance level. 
When trying to identify important support and resistance levels, this technique, in most situations, turned out to be less effective than other generally accepted methods described in this article. But it is useful to a certain extent when there is no other way to detect these levels. However, if traders on the floor are guided by the price levels calculated using this formula, then you should not forget about them either. 
To determine the levels of support and resistance, technical analysts also use the percentage of the value of the price rollback to the value of its previous movement. The most famous is the 50% rollback. Very often, a trending market will correct by about half the size of the last move before the original trend resumes. I say “approximately” because the number 50 should only be used as a general guide, not an exact number. It’s okay if the market does not reach 50% during the correction or, on the contrary, slightly overshoots this level. In general, any market correction should be no less than 33% and no more than 66% of the previous move. 

The one-third and two-thirds retracement levels correlate very well with the key Fibonacci numbers (38.2% and 61.8%) that are widely used by many technical analysts, especially those who are adherents of the Eliot wave theory. Once the market has retraced more than two-thirds of its previous move, the short-term trend is in question. Technical analysts have many different techniques at their disposal to identify potential areas of support and resistance. I will only emphasize that it is better to conclude the location of these zones using several methods simultaneously. The key support and resistance levels will be exactly where the forecasts obtained using various methods coincide. By correctly identifying support and resistance levels, a trader will increase his profits and minimize losses since, with the help of this knowledge, he will be able to determine the turning points of the market.

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);
  }