Support levels forex

Whether in a bullish or a bearish trend , the price must hesitate when rising or falling. Those levels should be used to find out a range, and ranges form when the price has multiple support and resistance levels to clear. In the end, the cuts were so aggressive that the ECB ended up with the rates in negative territory.

Determining Support and Resistance Levels

However, if you look on the left side of the chart, at one moment in time there is a bounce. Remember that this is a daily chart and each candle represents a trading day!

This bounce resulted in a consolidation area that took some time to resolve; and from it, we can take the future resistance levels. Moreover, on the move to the downside, the price made a low followed by a strong bounce, only to try for a new low. It failed, but in doing that, it gave us the area of support that needed to be cleared for bears to be fully in control.

What is important is to be aware that every time the market meets resistance any long trades should be closed, while on support any short trades should be booked. If anything, initiating a counter-trade is the wise thing to do. Looking closely at the chart below, now that we have identified a range given by support and resistance levels, traders have plenty of things to consider.

In between these two areas is the original level that was used as the source for this analysis, and that should be considered a pivotal level.

Such a level has multiple implications in the sense that every time price is above it, the bias is a bullish one, while when the price moves below it , the bias is a bearish one. Using the example above, the classical support and resistance levels, together with the pivotal level, are still valid, over 18 months after we first made this chart. In the meantime, the market offered plenty of opportunities to trade this currency pair , with selling orders being aligned every time the market tried to break the upper side of the range.

The pivotal level plays an important role as well as, like mentioned earlier, the bias should shift with every cross that price makes. Trading classical support and resistance areas has the advantage of levels being visible, and there is no room for interpretation when the market comes to these areas. If the levels are on longer timeframes, such as the daily chart in this case, then traders have virtually no excuse not to react properly.

However, there are some other tools that can be used to make the trading decision as smooth as possible and to remove any doubts.

What are support and resistance levels?

Here at the Forex Trading Academy we have covered multiple oscillators, and how to trade with them. Such oscillators can be used here as well when the price is at a support or resistance area. The chart below shows the Relative Strength Index RSI oscillator applied on the same chart as the one above, and the period used is the same as the default one: the 14 one.

In this case, the RSI is being used in a classical way, to identify overbought and oversold levels. If these overbought and oversold levels happen to form in a support and resistance area, then we have a double confirmation that we should react with a trade. The chart above shows five instances when the price was overbought and at resistance, indicating potential short trades to be taken; and three situations when the price was oversold, indicating that long trades are recommended.

Even if a short or a long trade as described above is not traded, at least previous trades should be closed, as a reaction at these levels is supposed to follow. What needs to be remembered all the time is the fact that there is no holy grail in trading, and these areas are somewhat relative: Traders do not know when the range is going to end, nor whether the market is going to react at these levels. This can be done by respecting classical support and resistance levels, and patiently waiting for ranges to be broken before engaging in trend trading.

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Sign up to our newsletter in order to receive our exclusive bonus offers and regular updates via email. Look at the diagram above. When the price moves up and then pulls back, the highest point reached before it pulled back is now resistance.

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3. Is There a Reliable Way to Calculate Support & Resistance Levels?!

When the price continues up again, the lowest point reached before it started back is now support. In this way, resistance and support are continually formed as the price moves up and down over time. Say what? One thing to remember is that support and resistance levels are not exact numbers. Often times you will see a support or resistance level that appears broken, but soon after find out that the market was just testing it. There is no definite answer to this question.

Some argue that a support or resistance level is broken if the price can actually close past that level. However, you will find that this is not always the case.