The levels of support and resistance are of great help for traders. Once they are drawn on the chart, of course. And drawing them is not always such an easy task as one can think. The support and resistance to be reliable, have to be marked correctly.
In this article, you will learn about a few good methods to identify the support and resistance levels on the Olymp Trade platform.
The methods I will present are as follows:
- Local lows and highs
- Multiple timeframes
- Moving averages
- Fibonacci levels
- Trendlines
Key Takeaways🔑
| →Identifying support and resistance levels accurately is crucial for successful trading. |
| →Different methods including local lows and highs, multiple timeframes, moving averages, Fibonacci levels, and trendlines can help establish these levels. |
| →Practice is key in mastering these methods and applying them effectively in trading scenarios. |
Contents
Local lows and highs
To identify the support and resistance levels through local lows and highs, you need to prepare your chart first. Choose the asset, select the timeframe, and look at the chart. Mark the highest peak and the lowest bottom. ATH will be the first one – the All-Time High. ATL will be the second extremum – the All Time Low.
The next step is to mark all the peaks and all the bottoms on the chart. In an uptrend, they will be called higher lows (HL) and higher highs (HH). During a downtrend, there will be lower highs (LH) and lower lows (LL).
Each horizontal line that marks lows and highs serves as the support or resistance as well.
Let’s look at the chart. During the uptrend, HLs represent the support levels and HHs the resistance. During the downtrend, LHs are the resistance and LLs the support.
Multiple timeframes
This method requires you to incorporate the support and resistance levels from the higher timeframes. When you are trading on a 15-minute timeframe, check the support/resistance on the 1-hour timeframe. Mark the levels. Then go to the 4-hour timeframe and put the levels from there onto your 15-minute chart.
The levels are much stronger when the support/resistance from the higher timeframes correspond to those from the lower timeframes.
Moving averages
Moving averages are the next way to identify the support and resistance levels. It can be the Simple Moving Average or the Exponential Moving Average. You can adjust the periods to check what suits best this particular purpose. You can try the 20-day or 55-day moving average and check how it works.
Moving averages simply act as the dynamic support/resistance, which means the level is changing together with the moving average movements.
During the downtrend, you will observe that the moving average creates a dynamic resistance level. The price hits it and then continue to fall.
During the uptrend, the moving average will act as a dynamic support level. Again, the prices come close, maybe touch it or even cross and then go further up.
Fibonacci levels
Popular Fibonacci levels are also a good method of recognizing the support and resistance levels. The most commonly used in the currency market are 0.382 and 0.618.
A major upward or downward price movement is often followed by a large retrace of the initial motion. And often this retracement continues up to the Fibonacci levels.
Let’s look at the example below. After the long move down, the price retraces up to 0.618 which can be taken as the resistance here. From that point, the price is falling again.
Trendlines
When you are planning to draw a trendline, you need to identify at least two peaks or two bottoms. However, the more the better. With multiple tops or bottoms, the trendline will be better confirmed and thus more valuable.
A trendline will act as the support during the uptrend and as the resistance during the downtrend. The prices seem not to overcome these lines.
In a sideways trend, the trendline creates very strong support and resistance as they are testing those levels multiple times.
Pros and Cons of Identifying Support and Resistance Levels😊🙁
Pros😊:
- Improves trading strategy: Accurate identification of these levels can help traders make better-informed decisions.
- Variety of methods: The variety of methods means traders can choose one that suits their style of trading.
- Can be practiced: Traders can practice these methods on their demo account.
Cons🙁:
- Requires analysis: Identifying these levels requires in-depth chart analysis.
- Experience needed: To use these methods effectively, a level of trading experience is needed.
Support vs Resistance Levels📈📉
| Factor | Support vs Resistance |
|---|---|
| Definition | Support is the price level where demand is thought to be strong enough to prevent the price from declining further, whereas Resistance is a price level where selling is thought to be strong enough to prevent the price from rising further. |
| Role in Trading | Both Support and Resistance levels are essential in identifying potential reversal points in the market. They are integral to setting buy and sell orders. |
Summary
The support and resistance levels are very important in trading. They can be identified in various ways. Today, I explained how to use local lows and highs, multiple timeframes, moving averages, Fibonacci levels, and trendlines for that purpose.
You can use a different method to confirm the result you obtained from the first one. The levels are considered to be stronger when they remain the same while using distinct ways of finding them.
Go to your Olymp Trade account now and start practicing finding the support and resistance levels on the price chart. Share with us any comments you have on this topic. There is the comments section below.
Good luck!
Quick Q&A Section🔍
- Q: What are support and resistance levels?
A: These are crucial price points on the chart which can trigger buying or selling activity. - Q: How are these levels identified?
A: They can be identified through different methods such as local lows and highs, multiple timeframes, moving averages, Fibonacci levels, and trendlines. - Q: Why are these levels important?
A: They help traders to identify potential entry and exit points, manage risk and develop trading strategies. - Q: How reliable are these levels?
A: While no method is 100% accurate, these methods can provide reliable signals when used correctly. - Q: How can I improve at identifying these levels?
A: Practice on a demo account and learn from experienced traders or reliable trading education resources.