Identify Support and Resistance Levels with  Price Action Analysis

Knowing how to identify support and resistance levels is absolutely key in price action analysis.  It’s absolutely crucial if you want to succeed as a forex trader.If you are able to recognize these key levels, you will definitely seize the as a forex trader. If you find this aspect of price action analysis, too overwhelming, not to worry! One way or the other, you will learn  how to identify support and resistance levels and profit from these key areas. But first:

What is Support and Resistance?

Well support and resistance are clearly labeled zones on the forex chart, where the price of a currency pair is likely to come under pressure. Now why is that? This because support and resistance levels are psychological levels reflecting the intentions of  the market players. Such that when price runs into such opposition, it either causes a  ricochet(or bounce) in the opposite direction of the trend or initiates a consolidation(or downward slide of the price). Or, the level could also be breached,  resulting in the price initiating a speedy surge.

You can also describe support and resistance levels as zones where the interests of market players collide.Think of this scenario as a tug of war where the bulls( being the buyers) and the bears(being the sellers) are jockeying for dominance in the market. The bulls are confident the price will go up, while the bears believe the price will go down. And so we have a major clash of the titans going on here. Those who come out victorious will have the advantage of pushing the forex pair in their direction. Now you see why I say identifying support and resistance is absolutely crucial in price action analysis?

Which brings us to the next question:

What is the Difference Between Support and Resistance?

Support is the level below the current price, while resistance above the current price. However, when price penetrates  the support barrier, the support converts into resistance and vice versa. So when  the level of a bearish direction is broken, the price relocates under this level, and the old support level now becomes a new area of resistance.

How about we take a look at the chart of the EUR/USD?

support-resistance

Now As you can see, the green circles shows the areas of support along the purple line. While the red circle shows the price initiating a break in a  bearish direction. However, the blue circle tests the price’s new resistance level. This graphic also  illustrates support level’’s ability to transition into a resistance and its influence as an opposing force.

So now that we’ve  established the difference between  support and resistance, I guess the next question is:

How Do We Find Support and Resistance Levels?

There is something you need to understand about finding support and resistance levels in price action analysis.Every bottom on the chart is potential support and every top is potential resistance. potential turns into reality when a price climbs up and down more than once. That is, if the price drops to a level and rises back, it’s considered an eventuality. So that  when the market tries to breach that level it may run into a brick wall. But if the price bounces again from this level it’s  confirmed a support. In that case the price is likely o repeat the bounce of the support in case the price drops again. This goes for resistance levels also.

But not all support and resistance zones have similar equilibrium. As a matter of fact, there are weak supports and weak resistances. In that case you’ll be better if you look for more reliable levels for smooth entry and exit points. Also make sure the support and resistance levels are older and have been able to hold up numerous times.

trade-support-resistance

This picture here illustrates a stronger resistance versus a weaker support featuring the EUR/USD pair.The purple line represents the price’s resistance coming under severe pressure, while the dark line illustrates the line’s support. The  circles show the exact areas where the level of resistance took a hit.

The purple line looks stronger since it’s a lot older and has absorbed countless hits.While the orange rectangle suggests consolidation of both levels with price bouncing back and forth as it struggles to break out of the range. But whenever you have  consolidation of two  levels with price bouncing back and forth , the price  it struggles to break out of the range. Giving the price’s aggressive stance, it’s only a matter of time before one of the levels gives in. Since the purple line  has a stronger resistance  it follows the market’s bearish direction because the dark line  support is bound to snap under  the incessant pressure of the purple resistance. The price breaks through the  dark support, and now turns into resistance as prices fall below the previous support level.

Now that we’ve learnt how to find support and resistance levels, it ‘ time to find out

How to Set Entry/Exit Points at Support and Resistance Levels

Setting entry and exit points are fundamentals every forex trader should know like the back of his hand. Why? Because all forex pairs have different support and resistance lines. So you need to keep a sharp eye on the price action happenings around these areas. If you can master support/resistance entry and exit points, you will have covered the fundamentals of your forex trading knowledge.

Now that we’ve gotten that out of the way, let’ get down to:

Setting Entry Points on Support/Resistance Levels

Let’s say a forex pair’s price approaches a tried and tested support zone. Since this support zone seems unbreachable, you will set an entry point once the price hits the support level. But first wait for the price to touch base with the support level. Once that happens, take a long position only if the price takes a bullish direction at  this level. If you go long, the best place to place your stop loss is below the support area. Placing your stop loss below the support area will help you cut your losses n case the bounce turns out to be false and the support gets broken.

Let’s take a look at the AUD/USD graphic

set-entry-exit.png

The purple line looks established – a  solid prerequisite for  setting entry points.. The blue arrows illustrate the upward move after the price hits the support level. However, in scenario No. 3, the price takes a hit after a brief rise. You see why it’s important to put a stop loss when you trade? Also setting entry levels at support levels is no different from setting entry points at resistant levels. The principle is still the same.

Finally we come to

Setting Exit points at Support/Exit Points

Alright  say you’ve bought a currency pair, thinking it might go bullish. Then suddenly a resistance area sets up shop along the uptrend,  and you’ll like”  Hmmmm…looks like the price might go bearish on me, and cost me a chunk of my money. Time to put some security in place.” This is where you put an exit point in place.

The USD/JPY  graphic below should clarify things for you.

support-resistance

The thicker labels indicate the price hitting the support area. Along position is then established after the bullish pattern, indicated  by the red line. Then the price gets acquainted with an established resistance, which as absorbed a few hits and stabilized the value of the Yen. This will be a good time to set an exit to avoid losing your hard-earned profits. Anytime the price  hits the resistance, just slowly place a stop loss below the candle which tapped the resistance level.

Around the small faded line,if the price breaks into bullish mode, then you can choose to reopen your trading position. But if the price takes a huge hit, you’re covered with the stop loss that you placed earlier.

Which finally brings us to what you’ve been waiting for:

How Do We Trade Support and Resistance Levels?

Well there are two ways of trading  support and resistance levels. The first one is:

The Bounce

In this scenario, you wait for confirmation that the support/resistance will hold before you enter your trade. Instead of just buying or selling straight away, wait for the price to bounce first before entering. You want to avoid a situation where price suddenly moves fast and breaks through the support and resistance levels. The last thing you want is to catch a falling knife Let’s take a look at both scenarios.

These two graphics show the bounce  in action.  in the support we have confirmation that the support level has been able to hold. So we can now place our entry order along the price level and  our stop loss below the support level. The same situation goes for the resistance line also. Since  we have confirmation that the resistance level has been able to hold, we can now place our entry order along the price line and then place our stop loss just above the price line.

Which brings us to our second  support/resistance trading strategy:

The Break

Now ideally we’d love our support and resistance levels to hold till infinity. But it doesn’t always work out that way. At some point both levels ae bound to cave in.This is where the break comes to the rescue. There are two ways of trading breaks – The aggressive way and the conservative way. Lets first start with

a)The Aggressive way -To play the break, make sure the price  slices through the support/resistance zone with ease. You only want to enter when a price passes through these two zones with such conviction that you’re left in no doubt that you can enter your trade.

sr-aggressive.png

As you can see from this graphic, the price has sliced through the support barrier without much opposition. So it’s safe to place your entry order.

Which  mow brings us to:

b) The Conservative Way – This alternative requires a bit of patience especially after you lose a trade. Sometimes you make an entry expecting price to rise after bouncing off the support level. Suddenly things go horribly wrong and the price just slices through the support level. Now here you are staring at the scary possibility of your forex trading account going up in smoke.

Now the obvious temptation will be to jump back into the market to make up for your losses.- BAD IDEA. Instead, sit back, kick your shoes off, and wait for for the price to make a pullback to broken support or resistance level. And then enter after the price bounces. Let’s look at the illustration below.

sr-conservative

As you can see clearly, we notice a price pull back. So we can now go ahead and make our entries.

But I have to warn you though. Retests of broken supports do not happen all the time.Normally, when support and resistance levels are broken, the price will just keep on going and leave you holding the bag. that’s why it’s always advisable to put a stop order and not hope that the price will have a change of heart and give you a second chance.

If you’re stumbled in here looking to join the forex trade bandwagon look up Why Forex Trade Is So popular.  Next,if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots,  get started with What is Price Action Trading?  and then build up from there by reading the other price action posts on the blog.

Well that’s a wrap for “Identify Support and Resistance Levels with  Price Action Analysis” Yea I know this post is very long. But hopefully, you’d have learnt enough to apply when you enter the trades. Til we meet again next time, take care.

Looking to open a Forex trading account?

Sign up with EasyMarkets and Get a Free eBook – Beginners Guide to Forex Trade

 

Advertisements

377 thoughts on “Identify Support and Resistance Levels with  Price Action Analysis

  1. I appreciate you for sharing this post, I am a big fan of this website would like to be updated.

    Like

  2. I’m not that much of a internet reader to tell the truth however your site is really nice, keep it up!
    I’ll go ahead and bookmark your website to return later.
    Good luck.

    Like

  3. Excellent style and design and wonderful blog posts.

    Like

  4. Thanks for this post, I am a big fan of this website would really like to go on updated.

    Like

  5. Thanks for writing this great high quality articles. The information in this
    material confirms my perspective and you truly laid it
    out well. I could never have written an article this excellent.

    Like

  6. This site is wonderful, i truly enjoy it.

    Like

  7. It has always been my belief that good writing such as this
    takes researching and also talent. It’s very apparent
    you have completed your homework. Good job!

    Like

  8. Fascinating website, i read it but i still have several questions.
    shoot me an email and we will talk more because i may have a fascinating idea for you.

    Like

  9. Hi there, I found your website by way of Google while trying to find a relevant topic, your website came
    up, it looks fantastic. I have bookmarked
    it in my google bookmarks.

    Like

  10. Hmm it looks like your site ate my initial comment (it was
    very long) so I guess I’ll just sum it up what I wrote and
    say, I’m truly enjoy your blog. I as well am an aspiring blog blogger but I’m still new
    to the whole thing. Have you got any thoughts for rookie blog writers?
    I’d definitely appreciate it.

    Like

    • Just produce quality content and an eye pleasing design. Accomplish these two tasks,and you’ll have viewers streaming to your blog.

      Like

  11. I like this site it’s a work of art! Happy I discovered this on google.

    Like

  12. Hi there, I found your website by way of Google while searching for
    a relevant topic, your website came up, it appears excellent.
    I’ve bookmarked it in my google bookmarks.

    Like

  13. I’m typically to blogging and i really like your articles.
    The article has actually grabbed my interest. I’m going to bookmark your
    site and also retain checking for brand new material.

    Like

  14. My partner and I stumbled over here by a different web address and thought
    I might check things out. I like what I see thus I am just following
    you.

    Like

  15. Howdy, i read your blog from time to time and
    i own a similar one and i was just wondering if you get a
    lot of spam comments? If so how do you stop it, any plugin or anything you can advise?
    I get so much lately it’s driving me insane so any help is very much appreciated.

    Like

  16. Por otra parte, la necesidad de poder restringir los permisos de una persona para
    recoger a un alumno, propuso un inconveniente de diseño
    de bases de datos, que se resolvió con el modelo
    descrito, mismo que resultó eficiente en lo que se refiere a almacenamiento y proceso de la información, pero de manera especial,
    facilitó el empleo de los datos tanto para sus usuarios, que deben actualizarlos, para los programadores que tuvieron que hacer los programas correspondientes.

    Like

  17. Hi there, I found your website via Google while trying to find a related
    topic, your website came up, it appears fantastic. I’ve bookmarked it in my google bookmarks.

    Like

  18. Hello! Great stuff here, please keep us posted.

    Like

  19. This site is fantastic, i really enjoy it.

    Like

  20. You’ve got very worthwhile points! p.s. good site.

    Like

  21. Las extremidades de sus ramas, como asimismo las flores, señalaban hacia el cielo para apuntar la fe.

    Like

  22. I’m so thankful for this post and thank you for
    sharing it with us.

    Like

  23. Very well written information. It will be valuable to
    anyone who utilizes it, like me. Keep doing what you’re doing – for sure i’ll check out more posts.

    Like

  24. Woah! I’m really loving the template/theme of this website.
    It’s simple, yet effective. A lot of times it’s very hard to get that “perfect balance” between user
    friendliness and visual appearance. I must say that you’ve
    done a superb job with this. Additionally, the blog loads
    super quick for me on Internet explorer. Outstanding Blog!

    Like

  25. Thanks for finally writing about >Identify Support and Resistance Levels
    with  Price Action Analysis – Forex Filli <Loved it!

    Like

  26. Pingback: URL

  27. Hello, i think that i saw you visited my blog so i came
    to ?return the favor?.I am attempting to find things to improve my web site!I suppose its ok to use a few of your ideas!!

    Like

  28. I simply needed to appreciate you again. I’m not certain what I
    might have undertaken in the absence of the actual ways documented by
    you on such a theme. Entirely was a real daunting circumstance in my view,
    nevertheless viewing the very expert technique you
    solved it forced me to leap for fulfillment. I am just grateful
    for the service as well as hope that you are aware of an amazing job you have been doing training men and women using a blog.

    I know that you haven’t come across any of us.

    Like

  29. Hello! This is my first visit to your blog! We are a team of volunteers and starting a new initiative
    in a community in the same niche. Your blog provided us useful information to work on.
    You have done a extraordinary job!

    Like

  30. Hello, the whole thing is going well here and ofcourse every one is sharing data, that’s in fact excellent,
    keep up writing.

    Like

  31. I think everything published was actually very reasonable.

    But, what about this? suppose you added a little information? I mean, I don’t wish to tell you how to run your blog,
    however suppose you added a title to possibly get a person’s attention? I
    mean Identify Support and Resistance Levels with  Price Action Analysis – Forex
    Filli is kinda vanilla. You ought to peek at Yahoo’s home page
    and note how they write post headlines to grab viewers interested.
    You might add a video or a related picture or two to get readers excited about what you’ve written. In my opinion, it could make your posts a
    little bit more interesting.

    Like

  32. Thanks for ones marvelous posting! I really enjoyed reading it, you happen to be a great author.I will make sure to bookmark your blog and will
    come back at some point. I want to encourage that you continue your great
    writing, have a nice evening!

    Like

  33. Alambre apoya cabezas de las flores y asimismo extiende tallos para facilitar su manejo.

    Like

  34. This is such a great post, and was thinking much the
    same myself. Another fantastic update.

    Like

  35. You got a really good website, Pleased I found it through yahoo.

    Like

  36. Hi there! Wonderful stuff, please do tell us when you post
    once more.

    Like

  37. A fin de que tu relación pueda ser perfecta es necesario que obsequies todo el amor que tienes guardado.

    Like

  38. Excellent write-up, I’m a regular visitor of your blog.
    I enjoy reading your posts.

    Like

  39. Excellent entry! I found it very interesting.
    I’ll check back later to see if perhaps more posts are added.

    Like

  40. hello!,I really like yohr writing so a lot!
    percentage we keep upp a correspondence etra about your post
    on AOL? I need an expert in this house too unravel myy problem.

    Maybe thaat iis you! Taking a look ahead to see you.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s