Support and Resistance

The course should allow students to be able to identify Support and Resistance areas, or very well defined horizontal levels where footprints are left by all participants in the market where a dense amount of critical decision making are being made.

Support and Resistance Introduction

Support and Resistance

Support and Resistance

When markets move or flow they go up, they come down and they move sideways.  One of the ways in which we can make sense of these movements is to identify Support and Resistance areas. Support and Resistance are really terms that are used to describe an area, or very well defined horizontal level on any kind of price vs time chart where collectively, most market participants make decisions in order to buy, sell trades or place their stop loss to adequately manage their trades.

The picture above shows us the areas of Support and Resistance. To qualify as a Support or Resistance area the price must touch or turn at least 2 times at more or less the same price level. The more touches to this level the stronger the level is. As you can see from the picture above price touched the Resistance level at least 2 times, and the Support level at least 3 -4 times, making it a strong area from which you can use to take trades from.

The only exception to the rule of at least 2 touches is when the price make a high or low that forms a prominent turning point that stands out from the rest of the price movement.

The area or level shown in the centre acts as both a Resistance and Support level. This shows how the role of a level can be changed to be e.g. Resistance now and Support later on - or the other way around.

Quiz

In a normal situation what is the minimum number of touches to an area before we can consider it as a Support or Resistance level?

  • 4
  • 2
  • 3

How to draw Support and Resistance levels - Video

Homework

Please select any chart of your choice and then draw the Support and Resistance levels.

When done make an image of that chart and send it to [email protected] for feedback.

In the area provided below give in your own words what Support and Resistance levels are.

Support and Resistance

Support

Support is a price level at which a currency pair tends to stop moving down, then turns around and starts climbing. Support levels illustrate important psychological levels in the currency market. Support levels usually form because of the following:

  • Traders who missed an earlier buying opportunity decide it is a good time to get into the trade collectively.
  •  Traders who bought the currency decide it is a good time to add to their positions
  •  Traders who sold the currency decide it is a good time to take profits

Support levels are therefore areas where the Bulls think the price is attractive to enter a BUY transaction.

The picture above shows areas where price turned as it was going down, the areas of support with blue line clearly shows more than 3 touches of that area which signify a very strong support that traders can make a strong trading decision from. 

Support is a price level at which?

Support is a price level at which a currency pair tends to  moving down, then turns around and starts climbing.  

Quiz

Can a pullback in a trend to a support level provide a trader with a buying opportunity?

  • a BUY opportunity can be anywhere where price looks like it is about to turn
  • No
  • Yes, if the previous support was formed by a strong reversal, the next time the price reaches this support through a retracement can be another opportunity to enter the markets

Resistance

Resistance is a price level at which a currency pair tends to stop moving up, then turns around and starts falling. Resistance levels illustrate important psychological levels in the currency market. Resistance levels form because of the following:

  • traders who missed an earlier selling opportunity decide it is a good time to get into the trade collectively
  • traders who sold the currency decide it is a good time to add to their positions
  • traders who bought the currency decide it is a good time to take profits

The picture above shows price being resisted by areas as shown in pink bands.. The resistance is stronger if a previous support becomes a resistance.

What is the difference between a Support and Resistance area?

  • Support is where we take buying opportunities
  • Resistance levels also provide good buying opportunities
  • Price turns and go up at support level and goes down at resistance level.

Round Numbers

Support and Resistance Levels at Round Numbers

Traders have a habit of being wary when the price reaches a round number like e.g. 1.00000 or 1.5000 or even 1.5500 and 1.00500 so the price movement will often stop at these numbers for a while or even reverse. 

In the chart above we have marked round numbers with a horizontal line at 108.500, 109.000, 109.500 and 110.000. You can see how these numbers acted as support and resistance when the price reached them.

Major & Minor levels

Major levels

Support and Resistance levels provide "Structure" to the price movement on our charts. Charts have different time frames which offers different levels of importance of structure. Major structure levels are where the BIG reversals originate from, or in other words, where you can look for counter trend trading opportunities. These kinds of areas or opportunities are found in higher time frames such as the Daily, Weekly or Monthly time frames.  Therefore, strong market structure Support and Resistance levels from these time frames have a lot of authority associated with them.

The chart above shows the weekly Support and Resistance levels. These areas of support and resistance form major Support and Resistance levels. It is interesting to see that these levels are in operation over the last 4 years, showing that a strong level can have a very long life time for it to be valid.

Intermediate  levels

The market tends to move from structure highs to structure lows, or from structure lows to structure highs. Most times there will be a large distance for price to move through before it reaches the other end. Price isn’t going to move in a straight line – instead, price will zig zag it’s way up or down, sometimes stalling, and falling into intermediate consolation from time to time. When the market is on the move, it is consistently printing a sequence of higher highs / higher lows or lower highs / lower lows. When the market stalls, and starts moving sideways, it will often print static swing highs and lows which are swing points that continue to appear in the same area. These areas will make intermediate support or resistance levels that can provide some trading opportunities.

Swing levels

When we move to a lower time frame we will find some less important levels at a series of swing points that will create a swing level in an intermediate level.

When a swing high/low is broken the market often loves to retrace back and re-test that level from the other side. If the retest holds that could be a very low risk entry for a trade. Swing levels are usually levels where support and resistance and pull backs are formed on lower time frames. These areas can afford a trader a good opportunity to get into trading and profit from these levels in short term trades.

There is a trading system offered in the course (SR Levels Trading System), which shows in detail how one can trade these (and higher) levels for profit.

Choose true or false

  • Major Structure levels are formed on lower time frames
  • Swing levels or minor structures are drawn from weekly time frames
  • Major structure levels can also formed on the Day (D1) charts