Price Action: Support / Resistance Levels
In Forex trading, support / resistance levels are very important. They should be paid attention to regardless of what strategy you are trading, be it Price Action, or any other trading system. Levels will help to improve your trading many times. In this lesson, we will talk about what support / resistance levels are, how to build them, what levels should be paid attention to, and most importantly, how do we apply them in our own trading on the Forex currency market.
What is a level?
A level is a place of a break in a trend or “trading”. On it, there is a certain struggle between sellers and buyers, the outcome of which depends on whether the price will continue the initial movement or turn around and go the other way. Support / resistance level refers to any previous peak or trough. Let's take a look at this in a theoretical price chart.
Imagine that we now have a chart with an uptrend.
Let's mark the levels on this chart.
I highlighted them with red lines:
Also, at the end of our chart, you can notice that the price is at the same level and constantly rests on something. This is called trade.
It can be considered a level, so let's also mark it with a red line:
Thus, we found all levels on the chart.
Immediately I want to say that the level is not a straight line that matches a point to point with a certain price on the chart, but a zone that includes some space around it:
In this graph, you could immediately see that some local maximums and minimums lie on one straight line. But at the same time there is one that lies just below the others. This is normal, because he is also in the zone of our marked level.
So, a level is a point of a possible price reversal or, in other words, a place of increasing activity of traders. You probably have a question: "Why is this place so attractive to traders?" A similar reaction of the market is caused by the accumulation of limit orders of sellers and buyers. Why do they place their limit orders? The answer will be very simple. That's because it’s obvious to them where to put a stop loss. This is a feature of human perception, because not only robots, but also people trade in the market.
And besides, I note that robots are programmed by people who realize that people are trading in the market. They understand that instead of going into an incomprehensible space, where it is not clear how to set a stop loss, the human brain will look for something to catch on to. It tends to enter the market at such breaks.
A level is an accumulation of limit orders of sellers or buyers. Since there is a high activity of traders at the levels, the levels are a possible place for a price reversal or an increase in its activity.
How to find levels and build them on a chart?
Before starting to mark the levels on the chart, first of all, we must pay attention to the extremes, that is, the extreme points: the maximums and minimums of the graph.
As a rule, levels are usually marked on the chart with a red line, which is in the MetaTrader 4 toolbar:
We draw levels at the extreme points of the candles, while trying to draw them through the zone of maximum density of bars. What does this mean? For example, on the graph we have an extremum point.
She stands out with her tail:
It would seem that you need to build a level on its tail, but if you look at the chart carefully, you can see that the price fought off several times from an obstacle that did not allow it to go up. For this reason, we need to move the level just below the tail:
On the one hand, it is closest to the highest point, but at the same time passes through areas with the maximum density of candles. This gives a more optimal picture.
And once again I remind you that a level is not a line, but a zone. We look at the line, but remember that in fact it can have something like this area of influence on the chart:
I note that the price does not have to go to our line point by point. She can turn around and go in the opposite direction, before reaching the level we have built. Therefore, imagine a certain zone and work inside it.
How to find levels if you are a beginner?
It can be difficult for beginners to see peaks and troughs on the chart. This is because they do not have enough experience. In this case, switching the graph to linear mode can help you.
At first, it will be better to use it.
In the future, you can do this on a regular chart with candles or bars. I must say right away that it is very important to learn how to work with a normal chart, because it displays the extreme price points, tails and shadows of candles, and the constructed levels without them will be, to put it mildly, inaccurate.
Also, for training level building, the ZigZag indicator may be useful to you:
It will help you mark levels on the chart:
But I recommend you not to use indicators, but to find levels manually.
How to choose significant levels?
After all peaks and troughs are marked on the chart, it may seem that there are too many levels on the chart.
And if you rewind the chart and mark all the levels there, then in the end you will get a chart drawn in horizontal lines. And nothing but levels will remain on it. What to do and what to do about it? First you need to understand that not all levels deserve your attention. First of all, do not look far. It is not necessary to rewind the schedule a few years ago.
You need to understand that traders are looking at the current screen. Simply put, you need to look at what gets into the monitor, which is about 200 candles. Therefore, the distance that we need to pay attention to when finding levels on the chart is about 200 points or one screen. If near the limits of the screen there was a strong minimum or maximum, then when setting the levels it should be taken into account.
For example, it is worth noting the extreme value of Frank:
Since such extremes stand out strongly on the chart, traders will remember them for a long time, so you should not forget them.
Try to note clear levels that are visible to the naked eye. The greatest number of traders pay attention to them. If you go into technical details a little deeper, then at first we note the extremes, they are most important when the price is reversed. Next, we note the levels formed by the long tails - this is nothing more than the collection of stop losses. Price made a move, enriching market makers. Traders remember these levels and use them in trade in the future.
In addition, it is necessary to note the levels from which the impulse movement occurred with breaking through local minima and maxima. And, of course, we mark the levels where there was a strong long-term trading, when the price was not allowed to go up or down.
Now that I have given you information about what levels are worth paying attention to, let's edit them in our example.
This is what our chart looked like with the levels noted earlier on it:
Let's start editing from the bottom, from left to right. The lowest level was extreme. After it there was a price movement that broke through local highs, that is, it gave us a new high point.
From this we conclude that we leave this level.
The next level gave us about the same information as the previous one, but there was a trade. Price was not allowed to go lower for a long time. There is a certain power on it. Some large positions are being bought from him.
Therefore, we also leave it:
It is consolidating and below a certain level the price is not allowed to go.
We marked the next level based on the long tail of the candle. But she did not give a good downward movement, so we remove this level:
There was no movement that would give us new local lows. If the price went down from this pin-bar, then the level would have taken place. But since there was no movement, then there was no result.
The next level must be set carefully so that it passes through a local minimum and at the same time grabs the candles behind it. This level has given us a new high point, so we leave it.
Next, we held the level, since the price touched it three times and subsequently gave a new high:
This means that we leave it.
For the next level, it may seem that the price takes it into account. But there were no new local minima and maxima in comparison with the previous one, so we delete it:
It is very easy to notice on the chart. It stands out, which means the level drawn through it, we will leave. It will attract traders and possibly benefit us. And the last level is at the very top. At the moment, it is held at an extremum. Therefore, it remains on the chart. This is how we edited our chart and cleared it of unnecessary levels.
In this article, we are considering levels of support and resistance. I usually call them just levels. But if you distinguish between these concepts, it turns out that support levels are levels that prevent the price from going below. And resistance levels are the levels above that prevent the price from going higher.
Our last completed level will be some time resistance to the price. He will resist her further movement upward.
Change of roles of support and resistance
And as you might already have guessed, support can become resistance after breaking down.
For example, this level has long been a support. After being pierced, for a while he became a resistance:
When the price struck him up, he again became a support level. Remember, if the price is above the level, then this is support, but if on the contrary, then this is resistance. Changing the roles of the levels on the chart is normal.
How to understand that the level has been broken?
Sometimes a zigzag price movement occurs on the chart. Because of this, you can get confused what level belongs to what. The price goes in a zigzag and breaks it back and forth.
Therefore, there is a very simple level criterion. To understand that the level is broken, you need to look at two candlestick closing prices at the level. If the level was broken for the first time, and then it was broken again, this means that the level is broken. This is nothing complicated, the main thing is to carefully monitor the schedule.
How to use levels in Forex trading?
To begin with, it is worth remembering that levels are a fulcrum. If you have a buy signal somewhere, and you see that the price is at a level, then this means that the signal has a fulcrum. It can be taken with more confidence.
For example, we have a buy signal at this point in the middle of the chart:
It does not have a fulcrum, so it is less significant than the next signal at the support level in the blue rectangle.
In addition, levels are used to define stop loss and profit taking goals. As for the goals, I think everything will be clear to you. The goal is the nearest level.
Stop-loss is placed just below the level if it acted as a support. Imagine that we entered the market somewhere in the area marked with a blue rectangle:
We would set a stop loss just below the level, giving some freedom to the price:
This is all determined by eye. There are no clear criteria for this.
What timeframes should support / resistance levels be based on?
On different timeframes, the levels have different meanings.
The level of support and resistance on the daily charts is much more significant than on the hourly charts. Therefore, if you trade intraday, I advise you to determine the levels on daily charts or on H4. And you can trade on the time frame on which you are used to.
Try not to invent extra levels just to justify your entry into the market. If the levels are next to each other, then we focus on the nearest. Remember that they are processed from right to left. In addition, do not forget that a rebound from the level is more likely than its breakdown.
If you trade levels, and not only use them as guidelines for stop loss and goals, then you can use: breakdown, rebound and false breakdown of the level. But about this we have separate video tutorials.
Levels in trading will be guaranteed to be useful when working with any strategy. Therefore, before entering the market, do not be too lazy to mark them on the chart. They will show you where it is best to enter the market and help you set a stop loss.