If you trade on any forex mobile, PC, or web trading platform, you have probably heard of the terms “support and resistance.” These two are the most important concepts in technical analysis; they study price movements and patterns on charts.
Support and resistance levels are horizontal or diagonal lines that indicate where the price is likely to bounce or reverse, respectively.
They can help you find the best entry and exit points for your trades, as well as set your stop-loss and take-profit orders. With them, you can also identify the direction and strength of the market trend and spot potential trend reversals.
In this article, we will explain how to identify support and resistance levels on different types of charts. We will also show you how to trade with support and resistance levels using different types of orders.
How to Identify Support and Resistance Levels
Support and resistance levels are formed by the interaction of supply and demand in the market.
When the price falls to a certain level, the demand for the currency increases, creating a support level. On the other hand, a resistance level is caused by a rise in price to a certain level.
These levels act as psychological barriers for the traders, who tend to buy at support and sell at resistance, or vice versa, depending on their strategy.
Types of Support and Resistance Levels
There are three main types of support and resistance levels: horizontal, diagonal, and dynamic.
Let’s look at each of them in more detail.
Horizontal Support and Resistance Levels
Horizontal support and resistance levels are the simplest and most common types of support and resistance levels. They are formed by connecting the lows and highs of price movements on a chart.
You can see this type of support and resistance level on any time frame or chart.
They are usually more reliable and significant when they are tested multiple times by price and when they are formed over a longer period of time. The more times the price touches a support or resistance level, the stronger it becomes.
However, this also means that the more times the price touches a support or resistance level, the more likely it is to break through it eventually.
Here is an example of horizontal support and resistance levels on a candlestick chart:
Diagonal Support and Resistance Levels
These diagonal levels indicate the direction and slope of market trends; hence, they’re also known as trend lines.
Diagonal support and resistance levels are formed by drawing trend lines that connect the rising or falling peaks and troughs of price movements on a chart. Depending on whether the price is making higher highs and higher lows (ascending) or lower highs and lower lows (descending), they can be either ascending or descending.
Here is an example of diagonal support and resistance levels on a bar chart:
Dynamic Support and Resistance Levels
When you see other indicators that change with price movements on a chart, that’s dynamic support and resistance levels. They are formed by using moving averages, Bollinger bands, or other indicators.
They are also known as indicator-based support and resistance levels, as they are derived from mathematical calculations based on the price data.
Dynamic support and resistance levels can be either above or below the price, depending on whether the price is above or below the indicator.
Here is an example of dynamic support and resistance levels on a line chart:
How to Trade with Support and Resistance Levels
Once you have identified the support and resistance levels on your chart, you can use them to plan your trades and execute them with confidence.
Here are some basic principles of trading with support and resistance levels:
- Buy at support and sell at resistance, or vice versa, depending on the market trend and your trading strategy.
- Use support and resistance levels to identify breakouts and breakdowns. This occurs when the price breaks above or below a support or resistance level, indicating a possible continuation or reversal of the trend.
- You can also use them to identify pullbacks and throwbacks, which are when the price retraces back to a support or resistance level after a breakout or breakdown, offering another opportunity to enter or exit the trade.
When trading with support and resistance levels, there are certain orders that can come in handy. They include the limit, stop, and market orders.
Limit orders: Limit orders are orders that are executed at a specified price or better.
If you want to enter or exit the trade at a support or resistance level, or set your stop-loss or take-profit orders, you can use limit orders.
Stop orders: These are executed when the price reaches a specified price or worse.
The perfect time to use stop orders is when the price breaks through a support or resistance level and you want to protect your position from adverse price movements.
Market orders: Market orders are performed at the best available price in the market.
You can use market orders to enter or exit the trade quickly when the price is moving fast or when the market is volatile.
Support and resistance levels are the most basic indicators when you need to find the best entry and exit points for your trade.
Your goal when using these levels should be to be flexible and adaptable. This is because they are not fixed and may change over time due to market conditions and events.
Remember that support and resistance levels may vary depending on the time frame and chart type you use. So, a simple tip: incorporate multiple time frames and chart types to identify them.