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5 techniques to set support & resistance levels
No trader can imagine trading without resistance and support levels. These levels define the boundaries within which a currency pair will trade and trigger rapid moves of the price.
Let us give small definitions of these two magic words. A resistance level is a level above which it’s quite difficult for a pair to rise. It doesn’t mean that the pair can’t go up beyond a resistance – it can, but there should be really strong supportive factors. Otherwise, the pair will turn around. A support level is a kind of floor for the pair as it slows down the pair’s decline. The pair can break below a support level as well, but the possibility of the reversal to the upside at this level is high.
As a result, these levels help to determine when to open and close trades to get profit. That’s why it’s very important to know how to set them accurately. We gathered the best techniques you can use to find resistance and support levels.
- Swing highs and lows
Let’s start with a small definition of the “swing highs and lows”. A swing high is a high price within a price movement. While moving up or down, the price does it in waves, so the swing high refers to the high price within the waves, before it goes back down. Contrary, a swing low refers to the low price within the waves, before it goes back up.
It’s one of the simplest techniques. You will find everything on the price chart and you won’t even require any tools or indicators. All you need to do is to mark the closest previous highs and lows. Naturally, you should search for highs and lows that are close to the current price. Pick out the obvious levels, which the price couldn’t break and as a result reversed. The more times the price reversed from this level, the stronger this level is. It shouldn’t be an accurate level as the price rarely stops at the exact same level, it will be several pips higher or lower. To mark the level you found, draw a horizontal line.
Have a look at the chart. 1.15 level appeared to be a strong support for EUR/USD. The pair rebounded from it two times: at the end of May and in the middle of June.
- Psychological levels
Psychological level appears when its price quote ends with 0 (the more zeros he level has, the more important it is). For example, 1.50, 95.00 and etc. The psychological levels appear because of human nature. For example, if you ask a person about his/her expectations on the future price of the GBP/USD pair, it’s unlikely the person will say 1.3028-1.4123. More likely, he/she will forecast 1.30-1.40. According to this logic, when traders place orders, they choose “round” numbers, and as a result, the pair trades within these numbers.
Let’s have a look at the chart. The US dollar index couldn’t break $95 level for a long time. And even when it broke the level, it couldn’t gain a foothold above it.
Parity level (1.0000) is the most important psychological level. For example, traders were actively wondering whether EUR/USD would hit parity or not in 2015-2917. Back then, the euro’s decline stopped at 1.0350.
You always should remember that a trend is your friend and it helps you in different trading situations. It’s not difficult to determine a trend. Have a look at the chart. If you see that a price continues its movement up or down for a long time, it’s a trend. Higher highs and higher lows define an uptrending market. Vice versa, lower highs and lower lows determine a downtrending market.
Looking for a trend you should remember that the line can’t be horizontal and it should connect at least 2 points (2 highs or 2 lows). Moreover, the second point through which you draw the trendline should be 20-30 candles away from the first one.
The more times the price touches the trendline, the stronger is the trend.
Let’s look at the chart of NZD/USD. There you can see the uptrend. All you need to do is to draw a trendline through each peak. As a result, the line will be a resistance for the pair. You also can draw a line through lows and you will get the support level.
The same technique will work for the downtrend.
- Pivot point indicator
When you implement the indicator, you will see 3 resistance levels, 3 support levels and a pivot point that is a border to determine the further movement of a price. If it trades above the pivot point, the movement is supposed to be bullish, otherwise, the bearish move is anticipated.
Resistance and support levels show accurate aims of the asset depending on a timeframe you choose. An advantage of the pivot point indicator is that levels change every time when the period of a timeframe you chose ends.
Note: you can choose any timeframe, however, we recommend you to use the weekly one. The indicator will show weekly aims for the pair, so you will be able to make a longer-term trading plan.
Have a look at the chart. you can see that at the end of the week, the pair broke the support at 0.69. However, it couldn’t break the next one at 0.6850, so it reversed.
- Fibonacci retracements
This tool is used to set resistance and support levels or to predict the potential scope of a price movement. Its main aim is to find a possible correction against the main trend. The key levels of the Fibonacci retracements are 38.2%, 50%, and 61.8%, they are the strongest support or resistance depending on the direction of the price.
There is nothing difficult in implementing the tool. Draw a trendline between the high and the low. If you want to learn properly how to implement the indicator, you can learn more here.
Let’s look at the chart of EUR/USD. You can see that the pair rebounded from the 38.2 Fibo level and is moving to 50.0. 50.0 will be a support for EUR/USD.
A small tip: you don’t have to use just one of these techniques. You can mix them, so you will get the more accurate aims.
Making a conclusion, we can say that resistance and support levels are your key to a profitable trading. You can use one technique or can mix them, but you definitely have to use them to reduce the risk and boost your profit.
Can we earn on false level breakouts? Yes we can, and Victor Sperandeo will teach us how. Check the article to replenish your arsenal with this outstanding technique.
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