The level of support and resistance is the basis of technical analysis, concepts that are familiar not only to professional traders, but also to newcomers. As practice has shown, prices for trading instruments vary within a clear price channel. Its upper limit is the resistance level, and the lower limit acts as a support line. Sometimes straight lines smoothly flow from one to another, performing completely opposite functions. Trade systems are very popular, based on building the levels. This is explained by the simplicity and availability of the chart analysis tool.
Subtleties of level building: psychology of trading
The level of support and resistance is built on the basis of the turning areas on the chart, also known as pivots. The construction of lines can be carried out after the formation of just one pivot point. When the price after the turn again reaches the previous high or low and can not break it - this is pure psychology, which is caused by uncertainty of market participants in its forecasts and determines the further direction of the price. Ultimately, the price breaks through the level and goes on the trend or unfolds, fighting off the extremum, and goes in the opposite direction. The more times the asset price will fend off a certain level, the more power it will have. If you build a schedule, a kind of lighthouses will form. They signal the presence of areas in which the price will behave in a pattern that is characteristic of the pattern.
What are support and resistance levels?
The level of support is a line that the price is not able to overcome in a downtrend. This is a certain point, which is perceived by traders as a place of successful entry into the market. When the price reaches the mentioned mark, traders consider long positions. In the region there is a huge number of pending orders, after activation of which the price is directed to the south. The level of resistance is a similar line, but the one that is not able to break through the price under the northern movement. Resistance is considered an advantageous area for opening short positions. In the region it is customary to establish a huge number of pending orders, the triggering of which pushes the price down.
Specificity of Level Development
Each trader should be aware that the level of support and resistance is a highly subjective notion that does not differ in characteristic accuracy. Clear lines on the chart rarely work. A focus on certain areas in making trade decisions is widespread. Zones of support and resistance are a price range in which a large number of orders are concentrated. The situation is caused by the application of identical methods of technical analysis by the majority of traders in their trading strategies. The dominant number of market participants selects similar entry points to the market, which determines the price movement. When the price crosses one of the levels, there is a clear signal to buy or sell the asset, which is facilitated by the acceleration of movement at a certain point in time. The prerequisite is the massive closing of orders for stop orders, which were oriented to reverse movement. Studying how to determine the levels of support and resistance, one must take into account the fact that the price quite often moves from one channel to another, which determines the transformation of support into resistance and vice versa.
Unity of opinion is the key to successful trading
The levels of support and resistance (the indicator helps to determine them as accurately as possible in a matter of seconds) are visually perceived by virtually all participants of the foreign exchange market. These are the lines that for a certain period of time restrain the price movement in a certain range. Areas are always considered by traders as potentially advantageous entry points to the market. Unity of opinions unfolds the price in the opposite direction. The ease with which lines are used in trading is determined by history. Correct technical analysis works in 90% of situations. Even with the location of extremums at different levels, the run-up between them turns out to be insignificant, and the efficiency of trade does not decrease.
The power of the levels and its effect on the price
The level of support and resistance can have quite a different force. The parameter will depend on how often and how exactly the price reacted to the line. The more rebounds were formed from the levels in history and the stronger the impulses were formed as a result of contact with the price, the greater the strength of the technical analysis tool and the more likely that the price will not be able to break through the range once again. When the price ignores the lines over and over again, it can be said that their use in trade by the standard will be ineffective. Attention of participants of the currency market attract those zones of concentration of orders, which alternately perform roles and support, and resistance. The strength of the levels allows you to make the most accurate forecast for further developments.
Does the role play a foundation?
Trade in the breakdown of important lines or making profits on the rebound is very simple, since they do not require an analysis of the fundamental factors. The reaction of prices to a certain value can be caused simultaneously by several factors. Prerequisites may be warrants for purchase or sale, the prevalence of opinions that the market has already exhausted itself, or hopes for the presence of forces to continue the movement. If you receive information from analysts explaining the reasons for a rebound or a breakthrough, you can say in advance that it is no more than a bluff.
Subtleties of construction or rules that violate the prohibition
The trading strategy, the levels of support and resistance in which play a dominant role, boils down to buying from support lines and to sales from resistance. Sometimes a bet can be made on the breakdown of key lines. The ability to learn from basic technical analysis is based on the ability to correctly build key lines. Ideal lines, within which you can profitably enter the market, must meet the basic criteria. Otherwise, the levels of support and resistance, forex not recognized, will lead to the discharge of the deposit. Working and priority is the line from which the price of the trading instrument bounced at least two times. The more the price reacts to certain price indicators in the same way, the higher the strength of the levels. Levels that have performed well in history, in comparison with those that have worked relatively recently, are of secondary importance.
Neither the professional trader nor the best indicator of support and resistance levels are able to line up to the point. Experienced market participants are well aware that the price quite often breaks through the channel, and then with a new force repels from its upper or lower limit and follows in the opposite direction. There are situations when the price simply does not reach the levels, but still intensively unfolds in the opposite direction. These inaccuracies and inaccuracies must be taken into account when using tools in trade. When levels are pierced several times at first in one and then in another direction, they begin to be ignored by the majority of market participants, and their application within any strategy becomes ineffective. Given the lack of punctual accuracy, the lines are allowed to trade at the ratio of stop to profit in the range 1: 3, and even 1: 4 and even more.
Building levels at different time intervals
The most effective and less risky is trading, when a trader undertakes to build a chart simultaneously for several time intervals. This approach allows you to clearly see the situation on the market and, therefore, helps to make the right trade decision. The purchase or sale of an asset will be accompanied by minimal risks, when the levels from different timeframes will match. The strategy will avoid opening trades against the trend, which will increase the chances of making a profit. It is necessary to pay attention to the fact that the levels will not always be purely horizontal. It is allowed to overlay diagonals with a slight slope on the graph. Clear support and resistance can take place in the terminal not only during the periods of the flat, but also in the descending and ascending trends.
Comparison of levels and other technical analysis tools
An approach to trading is considered to be effective when support and resistance levels (their indicator puts on the chart within a few seconds) are compared with other analysis tools. You can talk about the application in the trade of the optional levels, which show price tags with the maximum number of orders to close the transactions for profit. As an option, overlapping of the Gunn angles and Fibonacci levels is allowed . We welcome indicators that can show the amount of accumulated funds within each price range. To get stable profits, it is not enough to know how to determine the level. It is necessary to be able to track additional signals. The probability of a price hike from the level in both the southern and the northern direction is exactly 50%. To hope for good luck in trading is unacceptable. The forecast must be supported by at least three powerful signals, which are virtually impossible to refute. Understanding how to determine levels of support, resistance, only improves, but does not form a strategy.