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There are various methods that you can use to find support and resistance levels.
- Peaks and troughs
- Support and resistance levels from a previous time frame
- Fibonacci levels
- Moving averages
- Trend lines
Peaks and Troughs
Once you open the chart in the time frame you will be trading, identify the highest peak on the chart and mark it as the All Time High (ATH). Then find the lowest bottom and mark it as the All Time Low (ATL).
In the example below, we have a chart showing prices are in a downtrend. You mark each peak and trough with a short horizontal line. In a downtrend, each lower low will be a support level and each lower high will be a resistance level. Just have a look at the the chart below.
In an uptrend, we have the opposite. Each consecutive higher peak will be a resistance level, and each higher trough will be a support level.
Support and Resistance from Previous Time Frames
Another way to find support and resistance levels is to look in higher time frames to find the levels from there.
Looking at the chart below for example, if you are currently using a 15 minute time frame, look in the 1 hour time frame and incorporate the support and resistance levels from there into the 15 minute time frame. Then look into the 4 hour time frame and take those support and resistance levels to put in the current 15 minute time frame.
Note that if the support and resistance levels from higher time frames match those support and resistance levels of the lower time frame, (meaning they have the same price levels) then these would be more important and stronger support and resistance levels.
Moving Averages
Another method of finding support and resistance levels is using moving averages.
In a downtrend, the moving average line usually acts as a resistance and prices bounce off it and fall back down, as we can see in the chart above. In an uptrend, the moving average acts as support. In the example below, we can see that prices bounce off the moving average. We normally call this type of support, dynamic support, because the level changes every time the moving average moves.
You can use different periods of moving averages, such as the 20-day moving average or the 55-day, and so on. It can be a simple or exponential moving average. We looked at moving averages in detail in an earlier section of the course.
Fibonacci Levels
Another popular method of finding support and resistance levels is to use Fibonacci retracement levels.
We will not go into detail right now about Fibonacci since we have already explained this subject earlier in the course. What we would like to point out now is that the Fibonacci Retracement levels are used for support and resistance. The most common levels used in forex are 23.6 %, 38.2% and 61.8%.
After a significant price move, either up or down, prices will often retrace a significant portion of the original move. As prices retrace, support and resistance levels often occur at or near the Fibonacci retracement levels.
Let us look at an example. In an uptrend, we mark the Fibonacci retracement levels from the ATL to the ATH. In the chart below, we can see that after a strong move up, prices retraced part of that upmove by 38.2% and 23.6%, where prices rested for a while. Therefore, we can use this 23.6% and 38.2% Fibonacci retracement level as support levels. Also once ATH is penetrated, this can be used as a new support level.
In a downtrend, we mark the 23.6%, 38.2% and 61.8% Fibonacci retracement levels from the ATH to the ATL. We can see in the chart that after a strong move down, prices retraced to reach various Fibonacci retracement levels. We can use these retracements as resistance levels.
Significance of Trend Lines as Support and Resistance
In the chart below we can see that the uptrend line acts as support and price action appears to hold above this line. In a downtrend, prices stay below the downtrend line, which acts as resistance.
It is required to have at least two points, either two peaks or two bottoms in order to draw a trend line. This would be called a tentative trend line. If we have three or more points, this will be a valid trend line. The more points a trend line has, the more confirmed and the more important the trend line becomes.
When prices trade sideways in a range, they create strong support and resistance levels. This is because prices test these levels several times and bounce between the same support and resistance level a few times.
Once we find the support and resistance levels using all methods, we combine all the levels to select the more important ones. The most important are those levels who coincide when using different methods. For example if a trough coincides with 61.8% Fibonacci retracement and also with EMA (55) then it should be regarded as potentially strong support.
Now you know how to find the direction of the Trend and Wave at the time frame you choose to trade. You also learned how to find potential support and resistance levels close to which you should execute your trades. Now you will learn when to BUY or SELL.
