Hamed Tavakoli
Support and resistance lines are the levels that stop in the price chart due to the opposition of upward and downward forces (supply and demand). Therefore, it is the market players who determine these levels. Traders often pay special attention to these levels because they can be useful in predicting the future path of prices.
What is Support and Resistance in Trading?
Support and resistance are the levels where the trading price has stopped and followed a path opposite to the path it was taking, in other words the following explanation will reveal to you the concept of support and resistance lines:
- Support: the level at which the price stops its decline and moves up again.
- Resistance: the level at which the price stops its ascent and moves down.
The main difference between support and resistance is the direction of price movement. The longer the price has shown this behavior at these levels over time, the easier it will be to predict the price’s future path.
Additionally, support and resistance levels are considered psychological levels, which means traders tend to buy or sell at these points, which helps strengthen them.
What are Support and Resistance Lines Used for?
- Predicting the direction of price movement
- Deciding on the opening and closing time of trades
Not all support and resistance levels are of equal importance. For example, in an ascending channel, support levels are given more importance than resistance levels because a break of a support level can signal a trend change.
Identify Support and Resistance Levels
On a daily basis, many traders start their day in the world’s largest financial market, the Forex market, to take advantage of the huge fluctuations in the daily flow of 7 trillion dollars.
In general, these types of traders do not make bold trades, but they must have a detailed analysis of the forex market. It is at this stage that the question of how to calculate and identify support and resistance levels in the market is raised. The market has a rhythm. It is better to identify the underlying movement of the currency pair before trading on speculation and then trade.
Technical analysis is one of the favorite sources of thought for traders who base their trading strategies on it. This school is based on the principle that history repeats itself, and for this reason they give maximum importance to the history of prices.
After performing detailed technical analysis for support and resistance lines, various values are obtained as support and resistance levels that should be considered before making any trade.
Types of Support and Resistance Levels
Support and resistance levels can be divided into three categories:
- Fixed
- Dynamic
- Semi-dynamic
Fixed Support and Resistance Levels
Fixed levels are ranges of support and resistance that do not change. This level is always marked because the price may stop at this point again in the future. To identify stable support and resistance levels, you should pay attention to the following:
- Psychological price levels
- Annual highs and lows
- Up and down candles
- Starting and closing levels of candles
All these levels are fixed and do not change according to price movements.
Dynamic Support and Resistance Levels
Dynamic levels are support and resistance ranges that are constantly changing. Don’t worry if you don’t know how to identify these new support and resistance levels, the range is automatically recalculated every time a new candlestick or bar appears on the chart. In this type of trader, he uses the new level to make his decision, not the previous level that existed.
Semi-dynamic Support and Resistance Levels
Semi-dynamic surfaces are a combination of static and dynamic surfaces. They tend to move over time but not as much as dynamic surfaces. Semi-dynamic levels can be identified using indicators such as price channels, trend lines and diagonal levels.
Trading with Support and Resistance Levels
The best trading method is to use support and resistance lines in multiple time frames. While traders can use as many time frames as they want, the best approach is to work with three charts.
Using more than three time frames often causes confusion and less than three time frames provides less depth and understanding.
Read More: What is Risk Management?
The Three Time Frames Can be Divided Into Three Categories
- long time
- midterm
- short term
The three time frames to use mainly depend on the type of trader you are. Logically, a long-term trader would use the same set of charts as a day trader. Next, we describe the type of chart based on the time frame and the type of trader:
Long-term Time Frame (High)
These charts are best suited for finding key support and resistance levels that are strong enough to prevent a continuation of the trend or a price shock move.
These are the levels that traders should watch for possible price reversals and as a guide, but they should be careful not to trade at the levels that the price is close to.
Medium Term Time Frame
These levels are more suitable for finding trend continuation or breakout points or tops and bottoms in a range. These levels are not as large, strong and important as support and resistance levels in long-term time frames, but they are more suitable for reversals in corrective levels or breakouts.
Lower Time Frame (Short Term)
These ranges are even weaker than the intermediate time ranges. Traders can place trades on breakouts that are in favor or against the trend, or breakouts that are above or below ranges.
When the price breaks through the support or resistance levels in the lower timeframe, it can be used to set up a reversal if the analysis at the higher levels confirms that a larger reversal is possible.
