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Support and Resistance. Mirror levels. Trading strategy
Support and resistance levels are, no doubt, the most frequently used concepts of the market analysis. Support and resistance are used both in the classical technical analysis and in progressive directions – analysis of clusters, deltas and profiles.
In this article, we will tell you not only about the classical side of application of the support and resistance levels but will also show methods of their building on the basis of the volume analysis.
- Support and resistance levels in the classical technical analysis.
- Looking for trades near support and resistance.
- Indicators of looking for support and resistance.
- Round levels.
- Sloping support and resistance levels.
- Mirror levels. What they are and how they work.
- How to trade by the support and resistance levels. A scheme for building a strategy.
- Example. Entry into buys by mirror levels.
- Example. Entry into sells by mirror levels.
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Support and resistance levels in the classical technical analysis
Support and resistance levels in the classical technical analysis are a part of the graphic pattern analysis. Traders use these concepts for designating price levels in the charts, which, as a rule, act as barriers which hamper the price movement in a certain direction.
Usually, the support and resistance levels are built from the price extreme points. Such an idea of level identification seems simple but as soon as you delve into charts you will, most probably, find out that the support and resistance levels can take different forms. There are many extreme points. Should we consider all of them as support and resistance levels? Subjectiveness will make its contribution and it will turn out that finding support and resistance is not as simple as it might seem.
The chart above (15-minute oil futures chart) shows the support and resistance levels:
- Resistance from the local extreme point of the previous day;
- Resistance in action – the price slowed down its growth and rolled back downward;
- A new level was formed at mark 3 after breakout of resistance 1-2;
- The support level at the local low during a day.
What are the support and resistance levels?
Support is the price level, at which you may expect a stop of a downtrend due to concentration of the demand. Consequently, resistance is the price level, at which you may expect a stop of growth due to concentration of the supply.
It is believed that the support/resistance line has the bigger value the bigger is a number of times the price failed to leave its limits.
What the demand and supply concentration at certain levels is caused by? There are many factors:
- fundamental – political and economic factors;
- actions of major players ( how to identify actions of a major player in a footprint ) – central banks, key funds and investors;
- technical – for example, activity of traders at breakouts of classical formations;
- psychological – the market psychology plays an important role since traders and investors remember the past and react to the changing conditions to foresee the future market movement;
- organizational – dates of expiration, cut-off and other factors;
- technological – algorithm activity.
All these components, in a combination, identify the demand and supply powers.
If several support (demand) and resistance (supply) lines coincide and are, practically, at the same level, they form areas of support and resistance .
Looking for trades near support and resistance
As soon as the lines or areas of support or resistance are identified, they provide valuable potential points of entry into or exit from trades.
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When the price reaches the support or resistance point, it acts in one of three ways:
- bounces from the support/resistance level;
- breaks the level and continues movement in its direction until it reaches the next significant level of support/resistance;
- makes a false breakout (a trap).
We wrote about these three setups in the article about trading strategies .
The fish are found around the edges of a lake – not in the middle. It’s the same with trades. Most of them occur along the edges of the trading ranges. David H. Weis
When the market approaches the support or resistance level, traders could place their stakes on further development of events and learn soon whether they were right. If a trader has an opinion and opens a position (places a stake), but the price moves in a wrong direction (the opinion was wrong), the position could be closed with a small loss. However, if the price moves in the right direction, the movement (profit) could be significant.
Example. In this example (the picture below shows a day Facebook stock chart) we built the support line from the low in point 1.
This support level (1) reversed the price upward twice. There was a penetration through the support level in point 2 (overshot) and there was no touch in point 3 (undershot).
We showed an example of how to find the support level (it also works for resistance) building just a horizontal line from an extreme point. If the price formed an extreme point, it means that it already reversed from the level once. It’s quite possible that it would happen again. Such a simple but quite rational logic is clear to the majority of traders, who easily notice extreme points in a chart. But there are still such support and resistance levels, which are not seen by the majority of market participants.
Quite recently we wrote about how to find the support and resistance levels with the help of the Market Profile indicator .
Let’s see how to find the resistance level with the help of the profile in the same Facebook stock market.
You can see in the picture how the level of the highest volume (1) in the profile serves as resistance for further growth in points 2 and 3. Resistance as if creates the ceiling in the space where the price moves. A breakout started in point 4.
Indicators of looking for support and resistance
However, the Market Profile is not the only variant. Horizontal support and resistance levels could also be found with the help of the following indicators:
- Stacked Imbalance, Big Trades and Speed of Tape ;
- Maximum Levels and Dynamic Levels ;
- DOM Levels ;
- Margin Levels ;
- you can also watch our video about looking for the support and resistance levels.
All the above links lead to the articles, which describe methods of looking for support and resistance levels with the help of the volume analysis indicators. Use professional interests to look for the price reversals in those points, where only a few may expect them.
Whether we can use Moving Averages (MA)
The concept of support and resistance from the Moving Average is used in the classical technical analysis. This idea is often discussed both in traders’ forums and serious resources. Here, for example, is a chart from Investopedia.
The chart shows how the Moving Average (15) offers support and resistance in a trend market. Is this effect an illusion or the company stock value really depends on the Moving Average? Every trader makes own decision.
We believe that the support and resistance from Moving Averages is a special case of a multitude of market situations. It emerges because Moving Averages have a ‘lagging nature’. And an impression is produced that MA curves in the chart serve as support and resistance. It takes place under 2 conditions:
- when the market is in a trend (the price ‘runs away’ from the average value and the line runs for it – and it looks like support/resistance);
- when a period of the Moving Average was selected properly.
If the market goes into a flat, whatever period you select, the price will not bounce from the MA. It makes more sense to use Fibonacci retracement levels for building supports and resistances.
You’d better pay attention to the ATAS trading platform. It provides a wide set of instruments for looking for real levels. Download the test version of the platform right now and we will look at the support and resistance levels at a different angle.
The asset value may have difficulties with moving outside the round level of the price – for example, USD 100. The majority of traders, as a rule, buy or sell assets when the price is a round number, because they feel that, with a high level of probability, the stock (futures and currencies) are fairly priced at these levels. The majority of take profits and stop orders, posted both by retail investors and major investment banks, are posted at round levels of the price and not at such prices as USD 103.31.
Since many orders are accumulated at one level, these round numbers serve as strong price barriers. Just open the Depth of Market indicator in ATAS and check any market. You will see that more orders are posted at round levels. This fact cannot be denied.
Read in this article in more detail how and why round numbers create the support and resistance levels.
Sloping support and resistance levels
The above examples show how horizontal levels hamper continuation of the price upward and downward movement. However, markets are a complex multilayered structure. And while, during the day, an active trend develops ‘on minutes’, the day trend may show that the market is in a flat. Periods influence each other and the price barriers (support and resistance) change in time.
That is why it is important to understand the trend concepts when you study support and resistance.
For example, if the traders who trade stock by day charts feel panic fear and want to sell while the price rushes down, the more long-term investors, whose market view is formed with weekly candles, wait for a moment to buy near a long-term support line.
Look how quite recently the AMZN stock price several times bounced in both directions from the uptrend lines, which were formed several years ago.
Thus, investors will pay more attention to the paper price when it falls towards the super-important support of the trend line, because this is a historically proven value, caused by fundamental factors, which reduce the probability of further decrease of the asset value to the minimum.
An important factor of the growing trend in the market of many stocks is caused by the fact that the USD value reduces in time. Earlier, the grass was greener and 100 green presidents had a higher purchasing capacity.
However, not all markets grow. Traders will observe a series of descending peaks if an asset has a tendency to reduce. Perhaps, they would want to connect these peaks together to build a trend line and find profitable opportunities for entering into a short.
Example. Let’s consider a situation in the gold futures market.
Note that this a tick (1,500) chart and the period is not connected with time. Application of the nonstandard types of charts allows market assessment at a different angle and the resistance and support lines could become more obvious.
In this case, the resistance line is built as a beam, which starts in point 1 and passes through point 2. When the price approached this beam it reversed downward twice (points 3 and 4). That is why when the price approaches the resistance level in the descending market, traders are inclined to expect that the asset will face selling pressure and may consider the possibility of entering into a short position, because this is the line which previously pushed the price down.
Don’t miss our article about the points of entry into a market , where we discussed methods of entry from the support and resistance near the trend channel lines.
What are mirror levels in trading? The principle is simple. As soon as the resistance level is broken, it becomes a mirror one and works as the support. On the other hand, this level becomes a mirror one and works as resistance when the support is broken.
Look at the very first chart in this article. We showed a breakout of the resistance level there. Look what happened soon within the same trading session.
The former resistance acted as support, pushing the price upward, in 3 hours after the breakout.
The opposite works the same way – the former support offers resistance to the price growth. Example – a tick (1,500) chart of a Nasdaq index futures.
- First, the level of 7,690 worked as resistance;
- Then there was a breakout at a positive delta – green clusters tell us about predominance of buyers (we will discuss the delta value later);
- A breakout test at a negative delta. The level of 7,690 works as support now.
- A bearish breakout of the support with a negative delta.
- A breakout test. Mirror effect – the former support become resistance again.
Why mirror levels work?
The concept of mirror levels is practically constantly mentioned in the literature for beginner traders. It is well-known and is not put in question.
However, the issue of the cause of this phenomenon is not explained (if you have versions, share them in the comments, please).
Indeed, why does the resistance level work as support when it is broken? And why does the support work as resistance when it is broken?
Let’s reason for a while without pretending we know the truth. It is very important here to select the starting point for a logical chain. Let’s use the words of Bernard Baruch as the basic principle:
The main purpose of the stock market is to make fools of as many men as possible.
Consequently, if the market bounces up from the former resistance (a test of a bullish breakout), it means that someone was made a fool. Thereby, the market achieves its main purpose. If we understand who and how was made a fool, it will explain to us the nature of emergence of mirror levels (breakout tests).
Let’s consider an oil futures price chart; the data is from the Moscow Exchange; 15-minute period.
We marked the following in the chart:
- Short-term balance (auction) with formation of a curve in the form of a bell on the profile indicator. The upper boundaries of the profile is the resistance level.
- A trap (false breakout) in the descending direction before a true breakout in the ascending direction.
- Breakout. Note that the clusters are green and the delta is positive. This is an effort of buyers at the resistance breakout.
- The price approached the breakout level of 56.70 the next day and bounced, jumping upward. Breakout test.
- Local shakeout .
Why did the resistance level, which formed the balance (1) and was broken (2), push the price upward? To answer this question, let’s try to understand – who was made a fool?
Supposedly, these were buyers who were long in point (3). We can see them in the footprint by green clusters. After the price continued its upward movement, these buyers moved their stops either into the breakeven or to a level of small profit. It means that they were kicked out by their stop losses in point (4). They received a minimal profit (or didn’t receive it at all) although they correctly selected the market movement direction. In other words, they were made fools.
The uptrend continued but not all bulls managed to enter into a position and/or hold it.
Now look at the previous NQ futures chart. Reason for a while what traders were made fools:
- at the area with the first red oval (test of a bullish breakout);
- at the area with the second green oval (test of a bearish breakout).
How to trade by support and resistance levels?
We already mentioned a number of methods of looking for support and resistance. Let’s speak about the practical side of the issue. How to use the support and resistance levels in trading for making profit?
In general, the scheme is the following:
- Looking for the support and resistance level.
- Waiting for the moment when the price approaches the discovered level.
- Receiving confirmation signals.
- Entering into a position.
- Accompanying the position ( protective ATAS strategies ).
- Closing the trade.
Every trader decides for himself what methods to select for looking for the levels and what signals to use. There is a multitude of variants. However, we will consider only one of them.
An example of entering into a position by mirror levels
Let’s select the following realization of the above scheme as an example of entering into a position using the strategy of trading by levels:
- Looking for a mirror level.
- Receiving a confirmation signal from the Cumulative Delta indicator.
- Entering into a position.
Entering into buys by mirror levels
First. We will use the already discovered level of 56.70 in the chart above (an oil futures). We have the broken resistance and we have to wait for a moment when it works in the mirror-like fashion – as the support.
Second. It is desirable to use the ATAS level alerts in order not to miss the approach to the level of 56.70 from top. The software will send the signal immediately, since the test could be very swift-passing.
Third. We will use the ATAS Cumulative Delta indicator to get a confirmation signal. However, we will do it in a creative manner. We will set the use of the Cumulative Delta impulse. To do it, please, open the chart and press Ctrl+I. Then add the Momentum indicator to the chart in 4 steps and use the Cumulative Delta indicator rather than the Close parameter as the data for calculations.
The picture above shows you how to set the indicator. If you do everything correctly, you will get the following chart view.
We selected 2-minute period to identify the moment of entering into a trade more accurately. When:
- the price enters the blue area (a supposed support level – we found it in the chart above),
- and the Momentum + Cumulative Delta indicator draws a reversal from bottom to top (it reflects a transition of predominance from sellers to buyers – these situations are marked with black circles),
- we enter into buys.
Entering into sells by mirror levels
Let’s consider oil futures; the data is from the Moscow Exchange; the tick type of the chart.
- Isn’t it strange that the buying splashes at the market peaks do not produce a result? The price doesn’t grow. It is a bearish sign.
- Manipulation character of movement. Perhaps, some news were broadcast and the market started ‘to boil’. This happens when the market gets an initial impulse for entering into a trend.
- Bearish effort at the support breakout. This is interesting for us. Facts (1) and (2) give us confidence that the downward breakout is a true one, that is why we begin waiting for a breakout test. The former support level should ‘mirror’ the price down.
- We will consider this moment with the 256-tick period.
Our ‘new friend’ – Momentum and Cumulative Delta (two in one) – shows drying out of the buying pressure (two grey circles show that the indicator line reversed down) when the price still didn’t begin to move down. This is a signal for entering into a short, assuming that the former support will offer opposition.
In accordance with the above hypothesis, the sellers who entered the market at yesterday’s downward breakout (3) were fooled. They were thrown out of the market through activation of the stop losses, which were located too close – in the breakout area. Drying out of buys at the peak of point (4) shows that the market has ‘misbehaved’ enough and is ready to start reduction.
As you can see, trading is not only the discipline and strong adherence to the rules. There is a place for creative activity in it.
ATAS provides you with a possibility to find a unique combination.
- 14 types of charts with any period;
- more than 70 types of indicators – each has its own settings. Indicators can be superimposed one onto another.
Download ATAS and play with it:
- to find the support and resistance levels;
- track the receipt of confirmation signals when testing these levels.
Then check your trading ‘on paper’, optimize parameters and you will get your competitive advantage. Best of luck!
Support and Resistance Zones – Road to Successful Trading
This Support and Resistance Zones Strategy will enable you to take trades exactly at the area price will reverse. Trading support and resistance lines are critical for every trader to implement into their system. In this article, you will learn how to calculate support and resistance, identify support and resistance trading zones, stock support and resistance approach to trading, along with forex trading support and resistance.
I am going to guide you every step of the way. Follow along as we cover support and resistance in forex, how to trade support and resistance in stocks, and how to trade support and resistance in options. This is a simple, easy to learn and easy to understand trading strategy. After you read this strategy, you will be able to identify these sweet spots where marvelous price action happens. So, keep reading and you won’t regret it. Also, read trading discipline which is an important skill for successful trading.
What indicator are we using for this strategy?
Indicators Used in the Support and Resistance Zone Strategy
Our indicators for this strategy will be price action and its relationship to Support and Resistance. to be honest, this is, in our opinion, the best way to trade support and resistance. So what exactly are these key areas? How to trade support and resistance levels? Before we explain the strategy we are going to define support and resistance. Here is another strategy called The PPG Forex Trading Strategy.
What is Support?
We have a specific article on this very topic so go ahead and read that here if you do not know what support or resistance is. Support is the level where price finds it difficult to fall below until eventually it fails to do so and bounces back up. It’s simply many traders making trading decisions at that level.
What is Resistance?
Resistance is the level where price finds it hard to break through to rise above it until it fails to and is pushed back down.
You should always suspect a reversal at Support and Resistance as there is a high probability that price action will reverse at those key levels. That’s because it already did that before in the past and it will continue to do so in the future as traders will always take caution on these levels. Some who had open trades will exit at those price levels and others will initiate new trades at these levels. That’s why it is crucial to learn to draw these Zones using technical analysis.
Steps for Trading Support and Resistance Zones Strategy
Now that we know the role of S&R Lines, which from now on we will call Zones. That’s because support and resistance are not a given line. If so, it would super easy for traders to know and every trader on the planet would have an entry order at that price.
They are more like zones that can be breached and pushed into. The trend may pull the price action back out of it, or maybe price action will succeed in breaking it for good. This is why you want to think of these points as zones.
Our main purpose in this Trading Strategy is to identify those Zones and use them for our favor and make great trade entries and exit points.
The First Step of the Support and Resistance Zone Strategy.
The first step of this strategy is drawing those Zones on our charts. This allows us to easily spot where the price would probably reverse. After you do this, it will resemble a support and resistance indicator only you now have zones to take advantage of. Drawing Zones on the chart is better done on a higher time frame so that we can examine the main reversal levels and the more critical points on the chart as a higher time frame shows us the bigger picture. It’s almost like what we talked about in our article about the importance of multiple time frame analysis.
We begin by drawing horizontal lines on recent Peaks and Bottoms like you see below in our chart example: Examine this chart as it is critical for you to understand these zones.
When you are doing support and resistance trading, a line with multiple touches is far better off as it is clear that it stood against the price and passed the test many times and it will continue to do so. WHY?
Because History always repeats itself and this continues to happen time and time again on every chart that you will ever look at. (Stocks, Options, Forex)
Note** Make sure to leave spaces between zones as drawing many lines will confuse you and worsen your trading decision. This strategy could easily be compared to our Red zone strategy that shows you how to draw zones on your chart.
When you take a look back after drawing Zones will find that those lines withheld the price numerous times before and will continue to do that numerous times more.
The Second Step to Identifying Support and Resistance Zones:
The second step is waiting for the price action to touch the Zone. What you can do is set your charts on 2 to 4 currencies and wait for your chance, as it may take some time for the price to reach the support resistance levels. The reason we say 2 to 4 currencies is because this is a good number of pairs to be looking at and will not overwhelm you. This allows you to have a good judge on your trade opportunity.
Basically, the higher time frame takes less time and attention than the smaller time frame. Alternatively, the smaller time frame has more signals as the zones may get hit more frequently. You have to be more focused if you’re trading small time frames.
In this chart we see the price action approaching support and actually almost touched the support so we wait to see the form and shape of the next candle.
If the price reverses that will be good, as it is what we are expecting. We will need a strong reversal candle though to assure that price will reverse and that it will not collapse back again.
On the other hand, if it breaks that level, it may be real breaking or a fake breaking. We also should see a strong piercing candle that effortlessly breaks that level to assure it will continue in the same way.
The Third Step for the Strategy Is:
The third step of this trading strategy is to wait for the candle which hits the zone to close. This will indicate the signal candle we are waiting for. Take a look at the candlestick pattern and ask yourself:
- Is it a bullish or bearish candle?
- Is it strong or weak?
- Big or small?
- Does it have long wicks or small wicks or no wicks at all?
When you can identify the kind of candle then you will be able to decide whether to sell short or buy long.
Knowing the type of candle is crucial to identify whether the entry is valid or not.
In the chart example above we see how Support rejected the price and pushed back up. We also see the candle that formed afterward to signal the end of the down movement and the beginning of and upward movement.
So how did we know it is strong, what it’s secret?
Before we go any further, here are some important factors in determining a strong candle. Because spotting that specific candle on zones makes the difference between winning trades and losing trades.
The Qualities of a strong candle are:
- Long body
- Formed after the previous touched the level but could not break it.
- Entirely taken the two previous candles.
This example shows us how a strong candle should look. As you can see, the strong candle overpowers the one before.
Here, you can see that those weak candles were not able to breach the Resistance line and had long wicks and could not break that level. So, we wait to see what will happen with the next candle. Will the price action break that level? Or will the resistance win and the price reverse?
On the first case ( the candle on the left that we marked for you): clearly, the price fell on the next candle which made it a valid reversal.
While in the second case ( the candle on the right that we marked): we had a very small candle which did not mean anything except that the resistance stalled the price for a while.
The Fourth Step to This Support and Resistance Strategy After You Analyze Your Zones:
The fourth step is to identify where you will enter the trade. You want this to happen at the pivot point or turning point. Here are the entry criteria.
Entry/Exit Criteria for This Support and Resistance Trading Strategy:
Your entry should be slightly above or below the signal candle which is the strong candle. This way you are adding more confirmation to your trade to make sure that the price will move towards the direction you expected it to move to.
Our stop loss should be placed on the other side of the zone and not too close to the level to give it some space. As we said, it is a Zone. Putting the Stop loss there makes sense because this is the end of the trade. The price is unlikely will reverse after that point.
So according to the rules of this strategy, below is an example trade:
We used a 3 to 1 RR but you can adjust according to your rules.
Now we have learned from this Support and Resistance strategy how to draw Zones and how to trade them successfully. We also learned how to determine the direction that the price will probably move to, so we could have a better edge in our trading.
If you liked this strategy or still need more information please leave a comment below and we will answer your questions!
Trading support and resistance, and discovering support and resistance zones are pivotal to your trading success.
Our Fibonacci channel strategy, and the Red zone strategy are very similar and will help you in understanding exactly what these so-called “zones” are as well so you can check them out also if you wish!
Thanks for reading!
Please leave a comment below if you have any questions about Road to Successful Trading!
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Using Speed Resistance Lines
Speed Resistance Lines is a great tool when in the hands of a savvy and intelligent trader. These lines are similar to the fibonacci fan lines. Learning and mastering the usage and application of these lines in your trading methods can prove to be very profitable. Speed Resistance Lines is not a trading system or method by itself but it is another tool which you can use altogether with other tools to determine good strong entry and exit points in the market. Speed Resistance Lines can help you spot support and resistance lines with some high rate of accuracy. Learning about it is never a waste of time. Enjoy the reading.
Are we able to tell the program to buy or sell based on these lines, the lines are what I use currently to trade, so they are of great interest to me.
Are we able to create an indicator line?
and when the indicator line is place on the chart the program can pick it up and buy or sell accordingly?, depending on the perameters within the new trend indicator line?
Now I think that would be a goodie, because when the mkt forms and gives its swings, then another opposing line could be placed to exit the trade.
Say, buy when indicator line is crossed (stops 30 pips) so this would be a downward trending line runnuing from top to top and once in a trade an opposing trend line could be place and this used as an exit (once swings occur), as the article says, when it breaks the 3rd trend line its usually over, I refer to this as the base line, once base line is broken, you can usually expect the previous run in the same direction to repeat, large or small..
Cheers, sorry I didn t mean to rave on.
The problem is not about possibility, because I think it is definitely possible to be coded.. However, complexity is the real problem and this is what will prevent coders from even giving it a try.
Programming such a thing to draw the lines would be reasonable, but it would need to have input as to the ‘extreme high and low’ that are to be used. All in all I think it would be more suited to manual analysis than to automated trading.
The purpose of the thought was to be able to (if possible) have an indicator that can be selected manually, but when activated on the chart would trigger a buy or sell once crossed, the only purpose is to get the ones you may miss if trading several or even if you needed to be away for a while but didnt want to miss a move.
I do trade it manually now.
Hello Bossxero does all mt4 platforms have these speed and resistance or can someone use fibonacci fan as well?
Hello Bossxero thanks for all you are doing here i really appreciated it all even my trading is improving i actually believe in support and resistance techniques can you give a breakdown on how to determine and recognise a false break of support and resistance lines in a strong market move. Ialso want you to resend that template for(perfect trend catching system) there was no link on the messenger when u chat with me yesterday. Thanks
i cant find this indicator in technical indicators in MT5. is there any specific tool for drawing these lines in MT5?
How to Trade Support/Resistance Lines using Reinforcement Signals
What is a support/resistance line? A support or resistance line is where the price is at a temporary equilibrium and is balanced between buyers and sellers. In other words it’s a point of “possible” reversal. The word “possible” is the key.
Support and resistance lines can be transitory and fluid. While they might seem deceptively simple, the market never plays out in the same way twice. So when trading with real money they should certainly be used in conjunction with other confirming signals.
Price action at support/resistance lines
So what are these reinforcement signals and how do we identify them to more effectively trade support/resistance?
There are three common price actions that happen at support and resistance. These are 1) price testing, 2) fake outs, and 3) breakouts.
Figure 1 above shows an example of these three cases.
Before you begin analyzing price behavior you’ll need to identify any current support and resistance lines. Then estimate how these will impact the price in the future.
The market rarely obeys the exact position of a “price barrier”. For this reason it helps to use a narrow moving average filter (1-5) to mark “a zone” where support or resistance is developing. This helps smooth some of the volatility and more clearly identify a “best fit” line on the chart. For an introduction see this tutorial.
1 – Price testing
When the price pauses at a support-resistance barrier it’s a sign that the market is undecided. Bulls and bears are evenly balanced. The price will test the line with tentative movements. Traders are waiting to see on which side the strength will develop. At this time there’s a lack of conviction.
A sudden price move at this point can induce either a rebound away or a penetration through the barrier.
In this situation, wait for a reinforcement signal that shows the market’s preferred direction. Figure 2 shows the market testing a resistance line. Notice how momentum slows as the price “bounces against” the resistance.
Finally a long bearish engulfing candle appears just after a tentative break. This signifies a “last gasp” where the bulls tried to push up past the resistance line but didn’t manage to gain enough force to carry the move upwards. The next few candles reveal the strength is now on the bearish side and the market plunges rapidly.
This bearish engulfing candle was the confirming signal here that likely triggered a cascade of sell orders. Waiting for a confirming signal will lose a few points on the trade but it’s better than calling the wrong direction.
2 –Failed breaks
A failed breakout or “fake out” is where the price breaks a barrier for short time and then returns back above or below it. Notice that failed breaks are seldom clean. The price usually tests the line a few times moving both up and down. These are called retests (more here).
Committing at this point is a 50:50 bet. It’s better to wait until a direction is clear.
Figure 3 shows a close up of the price action (from Fig. 1 above) as it approaches the support area. Notice on the first attempt the break is momentary. It then resumes upwards. By the second retests the bearish momentum has slowed significantly.
Signs of a false break are:
- Waning momentum just before and after the break
- The price retraces its path as momentum slows
- Absence of any strong directional candle patterns near barrier
- Absence or ambiguous oscillator confirmation, e.g. MACD
3 – Full breakout
Failed breaks are usually, but not always, accompanied by waning momentum. But once the price breaks a support or resistance barrier it will usually be with rising momentum and with some validation from other signals.
Figure 4 shows a zoomed view of the break of the support line from Figure 1. The first stage follows the same pattern as the false breakout.
However just before the real breakout, a powerful bearish engulfing candle forms. Momentum turns sharply downwards. At this point the market has enough drive to easily break down through the support. We then see a sharp fall as the price breaks clear of the range.
Again, the triggering signal here was a very clear bearish engulfing candle.
How to identify a full break:
- Look for clues in candle reversal signals: engulfing patterns, & hammer/doji patterns
- Look for signs of changing momentum: E.g. crossing moving average lines, oscillators
- Anticipate at least a couple of retests before the support/resistance breaks
How to measure the strength of a support/resistance line
Support and resistance lines can be highly subjective. For this reason it helps to have some objective metrics to gauge their strength.
High bounce to break ratio: To estimate the strength of a support/resistance line some traders use the ratio of “bounces to breaks”. A barrier that’s produced a lot of price bounces and few breaks is strong. On the other hand a line that’s had many breaks but only a few bounces is weak. The strength formula is:
For example, in Figure 5 the price bounced three out of four times, so the strength is 3/4.
Key areas where support and resistance emerges
Horizontal levels: The simplest kind of support or resistance is a fixed horizontal line. For currencies this can be a trading range or absolute price. For example you may hear traders say the euro has found a floor at 1.10 or a ceiling at 1.14. This means 1.10 is a support for EUR/USD and 1.14 is a resistance.
Pivot lines: Pivot lines are calculated from the previous day’s trading range. The idea is that market dynamics create levels where the price is likely to meet resistance or support and therefore reverse back on itself.
Whether pivot lines actually lead or follow markets is not clear. Some traders use them while others don’t. You can make your own mind up by downloading our pivot calculator.
Round numbers: Round number do evidently produce some support and resistance. This is probably because people are more inclined to place order stop losses and take profits at rounded numbers.
It’s more likely for someone to set a stop loss at 1.10 than at some arbitary number like 1.1038. Therefore bunches of orders can hit the market at these price levels. See Figure 6.
Overall, round number support/resistance is probably more important for stock trading where the price is usually ratcheting in a certain direction. Here, barriers like $30, $50, $100 have some news appeal – but this effect is difficult to monitor following stock splits and other adjustments.
Currencies trade in narrow ranges to several decimal places so the round number effect is probably less important than it is for stocks.
Ratio lines: Technical traders have long relied on ratios to predict reversals. Gann angles and Fibonacci are two popular methods. Fibonacci ratios work both on the price and time axis and trace out reversal lines and extend them into the future.
Gann angles and Fibonacci fan work in a similar way. They project ratio lines out from the top and bottom of the move. This is shown at A and B in Figure 7. The extended lines predict future support and resistance (ahead of point B).
Gann theory also suggests a fifty percent retracement rule where the price should retrace fifty percent of the original move before meeting support or resistance. You can look at any chart and find examples where these ratios do indeed work. Unfortunately though there are as many examples where they don’t.
Trend channels: Even the strongest trends have some oscillation where the market rallies then pulls back. Figure 1 shows a good example of this.
The channel in which price movement takes place provides areas of support and resistance. Technical traders say the trend is broken when a lower or upper resistance within the channel has failed to hold. In this case, the trend is presumed to have reversed when new highs/lows fail to break the upper or lower watermark that the trend has made.
For example in Figure 1 you can see the trend starting to weaken about two thirds along where it fails to break new highs. Eventually it proceeds to break the lower channel support.
Psychological barriers: These are big figure numbers for example EUR/USD breaking 1.0 (parity) or GBP/USD breaking 2.0. Of course there’s nothing special about these figures. Nevertheless as I said above, it’s best to be attentive because order volume and volatility will usually increase around these levels.
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I am trying the indicator but can you explain how to set it to alert me when it breaks any one of the lines. Do you use the strength value which displays on the chart or you trade on any line?
In the inputs box there’s a setting called alerts. Just set that as needed. You will need to set a distance in points as well for the alerts to trigger properly. Set to a bigger value to receive more alerts. If it’s a low number you would only get notified when the price is very close.
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