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While the markets sometimes form patterns similar to the one above, it should be understood that the markets are always dynamic and volatile; they appear different for each new day and each new timeframe, and thus identifying let alone profiting from these support and resistance levels is neither exact nor easy. Markets shift, ebb, and flow, forming zigzag waves, and if we look hard enough we can see some structure when resistance and support form to contain the motion, but in time they too will erode, disintegrate and prove invalid.
This article will seek to help the reader identify and draw these support and resistance levels as they form or shortly afterward, so you can take advantage of them before they become irrelevant. It is the price level at which buying pressure is so strong that it acts as a floor, preventing the price of an asset from being pushed downward. Support can be drawn using the horizontal line object tool in MT4, and you can insert this horizontal line along the lows of the trading range, the closes of lower bars, or a combination of the two wherever it seems the market has touched down and bounced up again.
Make sure your horizontal line touches these lows and closes more than once. The more retouches called retests of these lows, the stronger the support is said to be. The above chart shows how multiple retests of the lows can act as support.
In the first channel, the market had touched the 1. The market retouched the 1. So far, the resistance was touched only twice, and it looks as if the market is heading back up to touch it again, if not break through. Also, pay attention to former resistance levels that were breached, as these can act as new support levels, particularly if there is no immediate support level.
A prior resistance level broken in the past, especially if it was a tough resistance level with multiple retests , can act as powerful support. You have to make sure to draw a horizontal line from the former resistance level across to the blank area underneath the current price action. If the price then bounces from this level, you have a confirmation that that is indeed a strong support level.
That former resistance area was turned into support, the level at which sellers felt reluctant to trade further down and at which buyers saw as the best opportunity to trade up. That new support level was retested on March 31 , with a big bounce upwards, providing confirmation that that level was indeed strong support. Thus, it was little surprise that when price again fell to that 0. The logic behind support is that as price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell.
If the larger trend is currently bullish, then a sound strategy is to take up buy limit positions along support levels, to take advantage of the better price and the swift bounce up, if the support is strong enough. Bear in mind that support does not always hold, and a break below support signals that the bears have won out over the bulls.
Support breaks and new lows signal that sellers have reduced their expectations and are willing to sell at even lower prices. A second strategy is thus to be prepared for a breakdown through support. You will be a seller looking for a breakdown through support, perhaps at the line itself, but even better at a confirmation point x number of pips below support.
Once support is broken, another support will have to be established at a lower level, perhaps at a former resistance. Also, once support is broken, it becomes new resistance, providing back up for your short trades. Resistance can be drawn using the horizontal line object tool in MT4, and you can insert this horizontal line along the highs of the trading range, or the closes of higher bars, or a combination of the two, wherever it seems that the market had hit a ceiling and bounced back down again.
Make sure your horizontal touches these highs more than once. The more retouches called retests of these highs, the stronger is the resistance is said to be. The above chart illustrates a very powerful level of resistance that first formed on March 22 at 1. At one point it looked like six or so H4 bars ended up with their highs near that level. It eventually fell back to the 1. The market bounced upwards from support with enough force to finally break the stubborn resistance of 1.
Interestingly, the traders took an opportunity to retest the former resistance, now support, of 1. The above chart is another example of resistance stubbornly holding and then breaking. The first resistance line was determined at The second resistance line was determined at Again there were repeated attempts to take out The logic behind resistance is that as price moves up towards resistance, sellers become more inclined to buy and buyers become less inclined to buy.
If the larger trend is bearish, then a sound strategy would be to take up short limit orders at or near the resistance lines, being prepared to exit at the confirmation of their break. You can see from the above charts resistance does not always hold and break above resistance signals that the bulls have won out over the bears. Thus, a second strategy that becomes profitable is to put in buy stops at a breakout, perhaps x pips beyond the resistance level in order to confirm it as a valid break.
If the resistance breaks, new highs signal that buyers have increased their expectations and are willing to buy at even higher prices. It all depends on the risk level a trader is willing to take. For example, it often leads to the loss of potential profit, since the price doesn't always retest the broken level.
So, the opportunity to enter a trade following this strategy can not always be found. This is typical for strong trend movements: breakouts are powerful, and the price rapidly moves towards the trend. Of course, retracements also may take place during strong trends. Such ranges form when the price is traded between two levels, one of which serves as support, and the other one as resistance.
Repeatedly bouncing from one to another, the price can stay in the range for a relatively long time. It's reasonable to assume that soon enough, touching the upper border of the range will be a good reason for selling the currency pair, and touching the lower one will be favorable for buying. As long as the price stays in the support or the resistance area, opening a trade is not recommended.
This is due to the risk that the price may break through the level and continue its movement beyond the horizontal range. For this reason, it is better to make trades only when the price bounces from support or resistance levels. As a part of this strategy, the zone between support and resistance levels is divided into price areas. Their number depends on the range height and features of the chart.
In this example, the trading range is divided into three areas:. Over time, the price may start to move slightly beyond the range, subsequently returning. The opposite situation is also a possibility — when the price stops reaching support or resistance areas. Traders often fall victim to the common misconception: the more often the price tests a level, the stronger it becomes. Undoubtedly, if the price often tests the same level, one might call it a significant one.
Suppose we are talking about the support. If the price regularly attempts to break through this level, this implies a growing pressure of sellers who will sooner or later prevail. In some cases, support can hold back the price for a relatively long time, and there is an explanation for this. The sellers major players benefit from keeping the asset price high until the orders are fully executed.
Therefore, they hold the price from falling, thereby forming the support. But in the end, all orders will be fulfilled, and powerful market participants will step aside. The price will start falling, and the support will be broken. We can draw an important conclusion here: support and resistance are meaningful price benchmarks that help to determine the right moment to enter a trade.
Therefore, trading strategies using support and resistance levels are quite efficient. However, sooner or later, the price overcomes almost any level. Contrary to popular belief, every breakout attempt makes support or resistance level weaker. Therefore, you should use support and resistance only as temporary guidelines. And in any case, do not ignore placing Stop orders, relying on the strength of the level.
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