Hello and welcome to another episode of the the bulls vs the bears. I know we’ve already covered support and resistance levels in the past. But today we are going to look at five support and resistance types you absolutely must know .The forex market can be every unpredictable. It goes up and down, and sometimes it veers sideways.
Some of you may think ‘ hmmm..support and resistance is too complicated. Well support and resistance levels is the backbone of price action analysis.. And they help form the basis for understanding the forex market. Through price action trading, support and resistance levels help us decide where we are going to place our stop loss and take profit targets. More importantly, support markets helps us understand three things:What;s happening on the market, what has happened on the market, and what is going to happen on the market.
So what are we going to do?We are going to look at how to use the seven support and resistance levels.
Swings Highs and Lows
One support and resistance level that you absolutely must know is the traditional swing highs and lows. You find these levels by zooming in to a longer time frame such as the weekly chart or even monthly chart. It’s been said you get a broader view of the market and the flash points within the market. What you want to do is simply identify obvious levels where price either reverse higher or lower or lower and draw horizontal lines at them.
Mind you, these lines don’t have to be perfect. They may either intersect candlesticks or be mere event zones. You absolutely have to do this when analyzing any chart. That should be the first step on your analysis itinerary. Let’s take a look at an illustration using the GBP/USD pair
This is the bird’s eye view that I was referring to. See the entire cocktail here – support and resistance levels, trends, and sideway markets. They immediately jump out at you in this time frame. You cant miss them.
Now let’s take a look at the daily chart(or time frame) to get a clearer picture
Here you see short term levels that you don’t see in the weekly chart. As you can see price finds support at 1.4000 level. Take a look at the two huge bullish candlesticks. The first one has a huge shadow and the second one resembles a very bullish reverse candle. The buyers keep pushing for the hills. The previous day’s candle looks huge to set a strong tone in the day’s trade.
The buyers now have the option of taking a breather(consolidate ) and create another huge candle and go long in this trade. This should cause price to surge further upwards and hit the resistance barrier around the 1.27500 level. So as you can see there are shor term levels in the daily chart that you don’t see in the weekly chart.
Next up is:
Swing Point Level In Trends
Swing point levels in trends reminds me of this popular forex saying. And it goes like this?”Old support becomes new support, and old resistance becomes new resistance.” This phrase refers to the scenario where the market creates higher highs and higher lows or lower highs and lower lows.
If I were you, I’d take note of the formation of these landmarks. Some one is probably asking “Why should I do that?” Well the market breaks up or down through these levels, that will be your cue trade temporary retracements also known as pullbacks back to these levels. With pullbacks you are dealing with temporary reversal of the prevailing trend, whether it’s charging up or nosediving down. When you see these landmarks form, get your trade ready.
Now let’s take a look at this phenomenon using the GBP/USD PAIR.
This is the classic illustration of the swing phenomenon we were talking about. You have resistance turning into support. Here GBPUSD pair twice run into strong resistance along the 1.750 mark twice. Once price breaks through this level we see the first pullback along the level of support.
Also these old support and resistance levels provide the perfect opportunity to place your limit orders on either side of the trend. You could place a buy limit order above the old resistance to align yourself in the direction of the breakout with a handsome risk to reward ratio so long as the pullback does not penetrate below the pivot line.
Next up is:
Swing Point Levels in Containment and Risk Management
Swing point levels are very useful as far as containment and risk management goes. You can look to buy or sell at swing points even if they are not part of a trend. One such instance is when the market goes into consolidation or the market goes sideways.Just use your most recent swing high or low as your entry point.
Let’s look at an an illustration of swing point levels using the EURUSD pair
The image above shows a sideways market stuck between the support and resistance levels. This happens after price broke through the support(formerly resistance) at the bottom end of the chart. The additional support level in the middle of the range . Look to buy at the level of support and sell at the level of resistance wherever you see those swing points. And you use these swing points as your profit targets.
Next up is:
Dynamic Support and Resistance Levels
Dynamic support and resistance levels are probably the most exciting patterns of all the support and resistance levels. They can pull back and find support or resistance without the need to stay horizontalThey change from period to period. I have this saying that dynamic support and resistance levels travel at the speed of light in that changes on the charts happen at lightning speed.
One tool that epitomizes dynamic support and resistance levels is the one and only moving averages. They help smooth out price fluctuations by helping you distinguish between price noise and actual trend direction When we mention moving average we are referring to the average price of a currency pair for a specific number of periods. Let’s see what dynamic support and resistance levels look like
See those squiggly lines? They reflect the moving averages. They reflect specific periods on the charts, One popular tool used to measure moving averages is exponential moving average(EMA for short. This moving average focuses on the most recent trading data.
See those three EMA tolls in different colors in the bottom right corner? They are three of the most popular EMA’s for measuring moving averages. 200 EMA looks at trading data covering 200 days, 100 EMA looks at 100 days of trading while 50 EMA touches on 50 days of trading data.
Now the 200 EMA is considered the most popular moving average. I can hear somebody asking “Why should I care?” Well they say the 200 EMA is where all the action is as far as trading activity is. And the small red circles reflect the way price reacts when the EMA’s approaches it. Sometimes price may steer clear of the 200 EMA. And when that happens it’s best to switch to a higher time frame to get a clear picture of where the price is in relation to the 200 EMA.
Next up is
Trading Range Support and Resistance Levels
Trading range(or sideway markets) support and resistance levels offer numerous high probability trades if you keep your eyes open for these opportunities. The trading range is just price bouncing between two paralle levels on the markets. Just keep an eye out for the trading range and then look out for price signals at those levels.
This is a much better option than just buying on a support breakout or sell on a resistance breakout. Because the last thing you want is to suffer continuos whiplash trying to buy or sell at these breakout levels. Just get confirmation through the signals that a breakout has taken place before you start trading them. Let’s take a look at what life on a trading range support and resistance levels look like
Here we have a ranging market with four sell opportunities at resistance level and two buy opportunities at the support level. Just place your stop loss orders just above the resistance level and below the level of support. Please don;t even try going long at resistance or short at the support. You’ll burn your trading account that way.
Notice the way price has broken through the lower support line and the upper resistance line. This creates false breakout signals only to return to the trading range. All this action is in the 5 minute time frame, and you want to forget that in a hurry. Focus on the long term time frames such as the h4 or daily.
For more information on trading ranges look up Forex Market Goes Sideways
That’s a wrap for “ Six Support and Resistance Types You Absolutely Must Know.” I hope you ‘ve understood how the above types of support and resistance levels work. Basically you use support and resistance levels to do the following: as indications of the state of the market, decide which levels to buy or sell from, how to define risk, and as a basis to understand what the market has done, what it’s doing, and what it’s about to do next.
When you combine a clear understanding of support and resistance levels together with price action and market trends you have what is known as T.L.S – Trend, Level, and Support.
Til next time take care.
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