Trading basicsUpdated 3 min readBy the FXNOD team
How to identify support and resistance levels
Support is a price area where falling prices have repeatedly stopped and turned up. Resistance is an area where rising prices have repeatedly stopped and turned down. Find them by marking the highs and lows where the price reversed at least twice. Treat each as a zone, not an exact line, and expect it to break eventually.
Why levels form
In a market made of real buyers and sellers, a level forms because people remember prices. Those who bought at a low want to buy there again; those who missed a high want to sell if it returns. Orders gather around those prices and the price reacts when it reaches them.
Five ways to find them
Mark the swing highs and lows
Zoom out. Mark each point where the price clearly reversed. Two or more reversals near the same price make a level.
Start on a higher timeframe
Levels from the daily or four-hour chart matter more than those from the one-minute chart. Mark the big ones first, then zoom in.
Look at round numbers
Prices such as 1.1000 or 2,000 attract orders simply because people think in round figures.
Check previous day's high and low
Widely watched, and therefore widely traded around.
Note where roles reversed
A resistance level that breaks often becomes support on the way back, and the other way round.
Draw zones, not lines
The price rarely turns at the same exact figure twice. Draw a band that covers the wicks and bodies of the reversals. If you need a magnifying glass to decide whether a level held, you drew it too thin.
How strong is a level?
- More touches make it more visible, and also more likely to break soon: each test uses up some of the orders resting there.
- A sharp move away from a level shows strong interest.
- A level visible on a higher timeframe outranks one visible only on a lower one.
- A level that has been cut through repeatedly is no longer a level.
Trading around levels
| Approach | The idea | The risk |
|---|---|---|
| Bounce | Trade away from the level when the price reaches it and is rejected | The level breaks |
| Breakout | Trade in the direction of the break once the price closes beyond it | A false break that reverses |
| Retest | Wait for a break, then for the price to return and hold the level from the other side | The retest never comes and you miss the move |
A caution about synthetic indices
Support and resistance come from the memory of market participants. A synthetic index has no order book and no participants setting the price: it is produced by a random generator. Lines drawn on it will appear to work some of the time, as they would on any random series. Do not size a trade on the assumption that a level there will hold.
Questions people ask
- What is the difference between support and resistance?
- Support is below the current price and has stopped falls. Resistance is above it and has stopped rises. When one breaks, it often takes on the other's role.
- How many touches make a valid level?
- Two reversals make a level worth marking. Three or more make it obvious to everyone, which means both more reaction and more attempts to break it.
- Which timeframe is best for support and resistance?
- Mark levels on a higher timeframe than the one you trade. If you trade the five-minute chart, take levels from the hourly chart.
- Do support and resistance always work?
- No. Every level breaks eventually. They tell you where a reaction is more likely and where to place a stop, not what will happen.
Practise it with virtual funds
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