This time, we’ll examine the fundamentals of trading support and resistance levels to see if this approach is comparable to the “exchange grail”.
After a few months of trading, only a lazy trader won’t have encountered the idea of support/resistance levels in relation to the price motion. There are a lot of advertisements for level trading techniques on the Internet, such as “successful level trading,” “trade levels as a professional,” “super profitable level trading system,” and so forth.
On forums, it is also popular to criticize other indicators and laud the level-by-level analysis of an empty chart. Those who utilize indicators look down on those who do not because they “haven’t understood yet” and because they do not approach trading in a professional manner. However, there is an error, which will be discussed further.
I can disappoint individuals who believe this analytical technique to be magical or superior to other techniques based on my own experience utilizing horizontal levels in trading: levels do not ensure 100% earnings. Any level that is the toughest can be broken by the price. Even though every trader on your favorite forum and every expert in the world described the level as “extremely strong,” the price can still easily break through it. Later, we’ll discover why it occurs.
In forex trading, what do support and resistance mean
Support and resistance were briefly addressed in the Common terminology part of my technical analysis essay. It’s time to go specific now.
The cost of the buyer’s or seller’s interest in an uptrend or downtrend, respectively, is referred to as a support level. That cost prompts traders to actively support the continuation of the trend. The opposite of support is resistance, which is the price level that causes market players to take profits and move in the opposite direction of the trend line, or to oppose the continuation of the trend. Support and resistance levels, however, aren’t just visible in a trending stock market. Those crucial levels can be seen even in a market that is flat. In that situation, the resistance level and the trading channel’s upper and lower limits, respectively, will serve as the support and resistance levels. On the chart, those values are typically indicated by a slender horizontal line. To visualize the starting point more clearly, I prefer to use rays. It has previously been established that a level’s strength increases with age when compared to later values.
How to Draw Resistance and Support Lines
With their eyes closed, seasoned analysts and traders can draw them. It will take some time for beginners. However, drawing support and resistance lines correctly must be learned in order to avoid costly mistakes. You only need to take these three measures to avoid them:
Step 1: Create a linear chart that is no less than 4 hours long
Shorter time frames, such 1 Min time frames, are more volatile and generate more false signals as a result. A lot of false signals will be generated by illiquid assets because they may not be informative on 1M charts and be full of abnormalities.
Candlesticks, which are a standard style of representation, may contain mistakes in their extended shadows. Therefore, using linear charts would be preferable.
Step 2: Use a horizontal ray to mark extrema. Green for the highs and red for the lows
The cost shouldn’t interfere with the line you’re drawing. If you have imitated my activities, your possession will resemble the image above. Additionally, I highlighted the mistakenly drawn ray in purple.
Why do I not advocate taking into account such rays? The analysis of a support or resistance region that has been broken is no longer necessary. Although most of these indications will be erroneous, the price might cling onto it for a brief length of time.
Step 3: The final step involves figuring out the dynamic support and resistance levels
That is simpler. Draw two parallel rays, one through each of the last two maximums and minimums. The trend line you’ll have as a result must remain intact for the pricing to be regarded genuine.
A no-breakout retest will be another clue that the support or resistance is dynamic. On the diagram above, I’ve highlighted its example in blue.
There can be multiple dynamic levels. A ray is more dependable the longer the price history it covers. But keep in mind to select the lines divided by the cost. In the chart above, I’ve shown such a line with a red cross. It won’t matter for technical analysis.