Support and Resistance Levels Explained

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Three Ways to Find Support and Resistance Levels

What is Support and Resistance?

Support and resistance are price levels that the underlying stock (or any financial trading instrument) can’t break through or exceed after multiple attempts.

A support level is a price level that a stock can’t seem to fall under due to the oversupply of buyers.

A resistance level is a price level that a stock fails to rise through, due to the oversupply of sellers.

Eventually, when a resistance level does break, it will often turn into a support level. When a support level eventually breaks, it can turn into a resistance level. Being aware of support and resistance levels are key factors that can determine the effectiveness and success of trades.

Confirming Support and Resistance Levels

A support or resistance level is made after it has rejected attempts to exceed them. These levels can be static and or dynamic depending on the indicators used to determine them as well as the time frame interval. Here are a few important things to keep in mind:

  • The strength of a support or resistance is increased when there are multiple indicators that overlap near the same levels.
  • The more times a support or resistance level is hit, the stronger that level becomes ingrained in the market.
  • Even more conviction is gained when volume rises at the support or resistance levels.
  • The wider the time frame of the chart, the more significant the support and resistance levels can be.

It is important to gauge the range of the deflections off the support and resistance levels. If the pullbacks get smaller, then a true test and potential break is possible. For example, if XYZ shows a resistance level at $20 but each rejection results in a smaller pullback before another attempt, then the stock may be setting up for a breakout. Strong breaks of resistance levels should result in a trend reversal. The same applies for strong support levels, which should eventually result in a trend reversal back up after testing.

Using Support and Resistance in Your Trading

Awareness of support and resistance levels helps to prepare for better trade entries and exits. It’s akin to having a map of a dangerous neighborhood ahead of time. The trader is better equipped to react at the inflection points to take profits, stop-losses or reverse the trade.

Plan Better Trades

Seasoned traders will usually wait for pullbacks to the support level to enter trades long and use the resistance levels to exit or trim down their positions. Taking a long trade near a support level limits the initial risk on the entry since a stop-loss can be taken relatively cheaper than chasing at the resistance level hoping for a breakout. If the support level manages to break, this allows the seasoned trader to reverse the trade relatively quickly and cheaply. This also applies for short sellers that will enter near resistance levels looking to profit on the price rejection and sell-off. If the price manages to breakout through resistance, the short sellers are usually the first to cover their position and consider reversing to the long side. Resistance levels that breakout can also be traded long for a new or next leg of an up trend. Support levels that breakdown, can be traded short for a new or next leg of a downtrend.

Pinpoint Targets

Support and resistance levels can also be used as target price levels. Just as a trader may enter longs near the support, they can also target the resistance levels to exit longs. A short sale trade near a resistance can target the support levels as the target to cover profits. One trader’s stop can easily be another trader’s target. Traders with the most accurate support and resistance levels are best equipped to take action for minimize losses and maximize profits.

Ways To Find Support and Resistance Levels

With the understanding of how useful support and resistance levels are, the next step is being able to find them quickly ahead of the other market participants. A stock can have multiple support and resistance levels. Some will be stronger than others. Therefore, it is important to establish from the start the two types of support and resistance levels that every stock has.

Static and Dynamic Support and Resistance

The two types of support and resistance are static and dynamic.

Static support and resistance price levels do not change regardless of the underlying price activity. Static levels are derived from specific price ratios or historical price formulas and remain in place for the duration of the session.

Dynamic support and resistance levels are more form fitting prices that will adjust with the movement of the underlying stock (or any financial instrument). They key word is adjust. They will adjust higher if the stock moves higher and lower if the stock falls lower. This allows for traders to trail and adjust their profit or loss stops more effectively with the trend.

Pivot Points

Pivot points are static support and resistance levels. They are derived from a formula based on the prior session’s open, high, low, close prices. The actual pivot point can be calculated with this formula:

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Pivot Point = (Previous Session High + Previous Session Low + Previous Session Close)/3

Once the pivot point is calculated, then the initial support and resistance levels are calculated:

Resistance Level 1 = (2 x Pivot Point) – Previous Session Low

Support Level 1 – (2 x Pivot Point) – Previous High

Once the initial support and resistance are calculated, then there are four additional levels to be extrapolated to cover the potential full range of movement for the underlying stock.

Resistance Level 2 = (Pivot Point – Support Level 1) + Resistance Level 1
Support Level 2 = Pivot Point – (Resistance Level 1 – Support Level 1)
Resistance Level 3 = (Pivot Point – Support Level 2) + Resistance Level 2
Support Level 3 = Pivot Point – (Resistance Level 2 – Support Level 2)

The pivot points result in six total price levels composed of three supports and three resistances. These levels remain in place regardless of where the stock is trading. These are inflection points that will trigger a reaction. When a stock approaches a pivot point level, the trader should be prepared for either a reversal or a break through the price level. Higher quality trading platforms have pivot point studies that will automatically calculate and plot the pivot points, which is very convenient.

Moving Averages

Moving averages are based on historical trade prices during a specified period and time interval to derive the average price, which is then plotted on a chart. By selecting two moving average lines, a trader can use them as dynamic supports or resistance levels. This prepares the trader to pull the trigger when levels are tested or broken. Longer periods and time frames generate stronger moving averages that tend to get more follow through. The shorter period is always the initial support or resistance. The longer period is the final support or resistance. When the shorter period crosses through the longer period, it signals a trend reversal.

50-Period and 200-Periods: Golden Cross and Death Cross

The two most commonly used moving averages are the 50-period and the 200-period simple moving averages. These are long enough so they don’t trigger constantly. When the 50-period moving average crosses up through the 200-period moving average, it results in a strong up trend also called the Golden Cross. When the 50-period moving average crosses down through the 200-period moving average, the resulting breakdown is called a Death Cross.

Significant Price Points

There are also price levels that are not specifically anchored by chart indicators but are more based on simplistic psychological areas or based on underlying derivative based mechanics.

Psychological Price Points

Psychological price levels pertain to levels like $100, $50 and $10 and whole dollar marks. These are simple levels that tend to have a depth of stop orders associated with them. As prices gravitate to these levels, the urge to exit or enter reaches a fever point. Stocks that hit a whole dollar mark (I.E. $8, $10, $15, etc.) will usually trigger some types of stop orders resulting in a volume spike with price break or reversal. The larger the psychological price level, the more significant the reaction should be.

2.50 Price Levels

Options have historically been priced in $2.50 increments up to $100 and algorithm programs have used these levels as inflection points. The phenomenon still exits in the markets where prices reach an inflection point with $2.50 increment levels are tested (I.E. $35, $37.50, $70, $72.50, etc.).

Overlapping Support and Resistance Levels

When support or resistance levels overlap on different indicators, they generate an even more significant support or resistance price level. The reaction tends to be stronger as the level becomes more significant. For example a 50-period moving average that overlaps with a pivot point can be a stronger support level than just the pivot point alone.

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How Forex Traders Can Find The Best Key Support and Resistance Levels

Verified Profitable Trader

-How to find key support and resistance levels in the forex market (or any market)
-How can I trade support and resistance zones, either using end of day price action or intraday strategies?
-Why is it hard to find good support and resistance levels to trade?

If there is a subject which repeats itself amongst forex traders who are struggling with price action, understanding and trading key support and resistance levels would be near the top of the list.

Common questions struggling traders ask are:

-How do I know if a support or resistance level will hold?
-If I have a full time job, and am trading end of day (or daily/4hr time frames), how do I choose the best support and resistance levels?
-How can I find the best support and resistance levels for trading?

Have you asked any (or all) of the above questions when learning forex trading online? Felt confused about understanding key support and resistance levels ? If so, then pay attention to this article as we’re going to put many pieces of this puzzle together regarding key support and resistance levels, along with how to trade them.

Key Point #1: How Professional Traders Relate to Support and Resistance Levels

Anyone who has seen how professional traders trade know they often place their orders ahead of time and less often do market orders. A general theme that shows up is about 70+% of all institutional orders are placed at prices ahead of time, while Traders who have shorter holding periods will often require a smaller stop. Hence they will want to get as close to the support/resistance level as possible to create the smallest stop available while maximizing their upside. Traders with longer holding times won’t require as much precision and will likely have a larger stop loss to avoid getting kicked out of minor swings to capture the underlying trend.

Now to give you a visual of how this works, lets look at the chart below on the USDJPY weekly chart.

As you can see from the chart above, I’ve drawn a line on top near 114.42 which I denote as ‘resistance‘.

Now here is how professional traders will attack this using the next chart below.

If a professional trader is bearish on the USDJPY (or thinks it’s in a range), they’ll sell the pair at or near 114.42. However, as I stated above, they’ll have different holding times and stop loss sizes . So what the order flow will look like is you’ll see various orders placed below the 114.42 level, while some will be above.

In this case, because two of the 3 wicks (in the chart above) which hit the resistance level stopped on a dime, you can assume there were a fair amount of orders just below the level. What you’ll also notice is the 3rd wick pierced through the 114.42 level, either due to a) bulls trying to push through resistance and see if they can produce a breakout trade setup, or b) traders finding liquidity just above it.

If you were able to somehow see the combined global order book for these 3 candles, most likely you’d see something like below:

Sell 10m 114.00
(with various orders selling between here and 114.42)
Sell 10m 114.42
(with various orders selling between here and 114.72)
Sell 20m 114.72
(with only a few orders above, perhaps up to 115).

While this is an overly simplified description of the order flow around this key resistance level, it serves an important point. Which is, it’s important to understand professional traders will place their orders at or around key levels . The variance in how they place their orders above/below these levels creates a ‘zone‘ of orders, which defend a level, and thus create ‘resistance‘.

If the sell orders are enough to hold any bullish pressure, the pair will sell off. If not, a breakout will likely occur, or a complex corrective structure will form.

Now the key take-home point here is: professional traders who are spotting the same level/price will most likely place their orders at/above/or below said price . This is what creates the ‘zone‘ effect, so try to avoid thinking key support and resistance levels as clear/perfect lines in the sand.

Key Point #2: The Larger The Support or Resistance Zone, The Greater the Variance in Orders Behind That Zone

In the prior USDJPY chart, the resistance zone was pretty small (about 30 pips from top to bottom). This makes it pretty easy to get some precision when selling at a key resistance zone.

But what happens when the support or resistance zone is much wider, say 100 pips or more? How do I trade that? Great question which I’ll answer below.

Meet the NZDUSD weekly chart, which currently has a wide resistance zone between .7312 and .7556, over 240 pips!

When you have such wide resistance zones, it means there is less ‘agreement‘ in the order flow between the bears in the market.

There are bears which feel .7310 is a decent resistance (as evidenced by the fact only 13 candles have closed above this since late Q2 2020). There are bears which feel strongly about .7433 being resistance as the pair has had only 2 weekly closes above this price since Q2 2020. And then there are bears which felt the extreme values for this pair should not exceed .7556. This is clearly shown since the kiwi could not produce one weekly close above this price.

So there is a lot of ‘disagreement’ specifically where resistance is, but there is agreement that this ‘zone‘ is resistance. Now anytime you encounter a zone (wide or small), you are faced with the same 3 trading choices when it comes to shorting it:

Support & Resistance Zone Trading Option #1: If you want the highest probability of getting in the trade , you’ll want to target the bottom of this resistance zone (flip this for support zones…e.g. top of the zone). By getting in a part of the resistance zone frequently touched, you’re increasing the probability you’ll get into the trade. The downside = a wider stop loss, which also reduces your potential profit.

Support & Resistance Zone Trading Option #2: If you want a solid probability of getting in the trade, while not wanting such a huge stop loss, you’ll want to get in somewhere inside the zone (ideally closer to the middle). This will slightly decrease the probability your trade will activate, but will increase your profit potential since you’ll have a smaller stop loss and thus greater target.

Support & Resistance Zone Trading Option #3: If you want the highest profit potential , then you’ll want to get in at the highest point in the zone (.7433 or above). The upside here is you can have the smallest stop loss possible, and thus the greatest profit potential. The downside is your trade is less likely to get activated (i.e. .7433 was only hit 4x since Q2 17′, while .7310 was hit almost 25x).

To clarify, I have a chart below for you using the same Kiwi pair to demonstrate this.

So that is the ‘framework‘ for how to think about support and resistance zones and how you should trade them. You’ll need to decide how you want to trade that zone based upon probability and profit potential. Neither choice is better or worse per se stylistically. You’ll have to find which of the 3 is most natural to you.

Key Point #3: Trading Support and Resistance Zones Means Trading ‘Probabilities’

I think one of the biggest confusions about trading price action using support and resistance levels is understanding probabilities , and relating to trading (or taking your trades) based on probabilities. This ‘confusion‘ has been perpetuated by a common ‘narrative‘ that you should wait for ‘confirmation price action signals‘.

Supposedly you do this to ‘confirm‘ the level will hold, and thus be more ‘probable‘. The fact of the matter is, most professional traders have already decided what level and price they want to enter, well before any said pin bar, fakey or ‘confirmation price action signal‘ has formed.

The underlying order flow is generally clear to most professionals before these 1-2 bar candlestick patterns have even formed, so they know which direction is more ‘probable‘, along with their trade location.

And considering nobody to date , after decades, has been able to establish with a verified live trading account, or with statistics that trading pin bars off key levels gives you a greater probability the trade will work out ( + profit ), this narrative is quite dubious and making traders more confused about trading key support and resistance levels. But I digress…

When you boil it down, there are two key points to understand here:

#1: Either the level will hold or not

#2: The order flow (and probabilities) are most likely in place whether a key support or resistance level will hold (or not)

The best way to determine either of the above is by learning how to read price action context and the order flow behind it. The context will create a ‘structure‘ which is reflective of the underlying order flow. 1-2 candlesticks likely isn’t going to change that, nor are they more important than an entire structure. Hence, when you can learn to read price action context and structures, you’ll be able to see which level is more likely (and probable) to hold (or not).

By doing this, you’ll be getting better trade locations than you would with any pin bar or confirmation price action signal. I demonstrate this clearly in my latest live trade video for +480 pips and +5R profit. Try to find a better entry using a pin bar (you won’t).

Hence by learning to trade without confirmation price action signals, and to understand the context in terms of probabilities, you’ll avoid missing perfectly good trades.

And if you look at my USDJPY or NZDUSD charts, you’ll see there were very few confirmation price action signals here, which = lost trades and profits.

USDJPY Weekly Chart

NZDUSD Weekly Chart

My guess is if you were to identify many key support and resistance levels over years and years of price action that produced great trading opportunities, you’ll see many times there were little or no pin bars, or any kind of confirmation price action signals, thus a lot of lost profits missing these high quality trades.

In Summary

So I’ve covered a lot of ground here regarding key support and resistance levels. The key points and methods I talked about above apply to any instrument, any time frame, or environment .

It’s important to note there is a lot more to understand when trading or finding key support and resistance levels. Such as how ‘clean‘ a level is, when a level is more likely to hold (or fail), what are the best levels to trade, how to find key levels using daily chart strategies, trading intraday, and more.

This is a big subject that cannot be unpacked fully (or well) in a single article. And it’s a skill you’ll need to build over time through practice, analysis and feedback from a professional trader and mentor.

Now if you want to learn more about forex trading key support and resistance levels, and improve your ability to find the best ones to trade, then check out my online price action course where we have over 5 hours of video lessons on this, along with quizzes, analysis and feedback from me and my senior students on how to find and trade the best levels.

Now Your Turn

Did you find this support and resistance level article useful and learn something new? If so, then make sure to leave your comments below, along with share/like/tweet it with others.

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