The concepts of support and resistance are certainly two of the most highly discussed features of technical analysis and they are often regarded as a complex subject. However; I have a simple definition of support and resistance:
Support: It’s the price level. Which believed that it should have strong enough demand to prevent the price decline more, or it’s the area where the price usually reverses strongly to the upside.
Resistance: It’s the price level. Which believed that it should have strong enough supply to prevent the price rise more, or it’s the area where the price usually reverses strongly to the downside.
The smart question is how could we define a strong area where the market usually reverses strongly. Well, that’s not easy, but by following some rules. With a little experience, we could do that easily.
The 7 golden rules to identify strong support and resistance levels:
1- Highs and lows: See the chart below. They are levels where the market serves as a floor-ceiling near previous high or low.
2- Trendlines: They work well in trending market. Example; In a bullish market. Traders are likely to wait for the price to dip towards the rising support. Then after a rejection is confirmed. That would be a strong sign of resumption, see the chart below:
3- Round Numbers: The price is likely to find some difficulties to overcome round numbers, for example, 1.3000 for EURUSD, see the chart below:
4- Fibonacci retracement and extensions: The main use of the Fibonacci retracement tool is to identify levels of potential support/resistance. See the chart below on how the EURUSD respected the 50% retracement around 1.3230 levels.
5- Moving Averages: The main use of moving averages is to identify the trend, when the price below moving average, the trend is bearish while If it’s above the moving average the market is bullish when price is rejected from moving average that would be a strong sign of resumption, see the chart below:
6-Momentum Indicators: The best use of momentum indicators is to identify possible support and resistance levels. When the indicator crosses above the overbought area. Then we have possible resistance when it crosses below the oversold area. We have possible support, see the chart below, we used CCI as an example:
7- Timing: Here comes the real challenge to identify strong levels. We need to look for intraday time frames and the bigger time frames. By combining them together. We could identify strong support/resistance levels in the short, medium and long-term.
Conclusion: In the next post, I’m gonna show how to put these facts into action, and how we could capture big moves!