Support and resistance levels are the key thresholds where the market trend is most likely to pause and potentially change course. This may be a particular price/price field. Interpretation of support and resistance depends on the time span of a dealer. To support the price pattern, it is better to use it in combination with other metrics, such as Fibonacci retracement ratios, moving averages, trendlines, etc. However, based on price alone, assistance and resistance levels may be traded.
In the previous article, we defined support and resistance levels in forex:
What is the support level?
Support level represents a hypothetical price level or price area supporting, or holding up, prices and signifying more forex buyers than sellers. Support is often viewed as a “price floor” because traders hypothetically expect that price change direction and begin to rise based on past performance.
What is resistance level?
Resistance level represents a hypothetical price level or price area consolidating, declining new high prices, and signifying more forex sellers than buyers. Resistance is often viewed as a “price roof” because traders hypothetically expect that price change direction and begin to fall based on past performance.
A support level is when consumers move in and get more competitive, thereby stopping the price from falling. Because of the lower price, selling pressure reduces as price drops for support, and consumers become more competitive because of these lower rates. The support mark will inevitably be breached, and the price will fall below it. Then the price will become the potential standard of resistance. A resistance level means sellers move in to become more competitive and prevent rates from soaring up. Buying demand reduces because of higher costs, and sale pressure rises as price rallies against resistance. Ultimately, a resistance barrier will break out, and the price will climb above it. This price would be the potential support level.
The Best Time Frame for Support and Resistance
The best time frame to draw support and resistance is M30 for day traders, H4 and Daily for swing traders, and Weekly and Monthly for long-term traders. However, professional traders use all chart time frames to add important levels for any trading asset.
Let us analyze one example using forex charts with support and resistance levels.
On the EURUSD chart using the H4 time frame, I added daily low, daily high, monthly low, and monthly high.
On this chart weekly high is almost equal to the daily high. Usually, in trading, one price level can be high or low for several different time frames. For example, if the current price is the highest high for the last 30 days, this level is at the same time daily, weekly and monthly high.
The higher time-frame means the higher impact of support or resistance level. For example, a monthly high has a higher impact on trading than a daily high. In that case, if the price breaks monthly price high, then we can expect a bigger movement than if the price breaks the daily high price.
Professional traders use all chart time frames to add important levels for any trading asset. For example, famous trader Michael Boutros on his chart adds all kinds of previous highs and lows, Fibonacci levels, Andrews Pitchfork indicator, channels, and trendlines. See chart below:
Gold price analysis – chart created by Michael Boutros intraday trader
As you can see, this professional trader added high and low prices for 2016 and 2018 (a few years ago) on the same chart. On his chart (analysis for 18. February 2021.) are yearly support and resistance levels, weekly support and resistance levels, and monthly support and resistance levels. He added important levels using multiple time frame analyses. So, all time frames are important for this trader, although he is an intraday trader.
At every time period, there are several degrees of support and resistance in traders’ charts to enter and exit the market. The meaning of the importance of support/resistance is all about the trading time span, whether the deal is long/short, and the number of times the graph indicates the importance for a certain price or region.
As a trader, you must decide which thresholds are most crucial for your trading plan and for particular time frames. For instance, it would be more relevant than a daily chart to recognize support/resistance on a weekly chart, which would be more useful than an intraday chart. There is generally not much relevance to intraday support and resistance ranges if you are a short-term swing trader.
Note, perception is rather arbitrary, and market actions can help decide the move at various stages. Indicators promoting the understanding of the levels establishes the primary and minor levels of support or resistance.
How to identify key price levels in forex for support and resistance?
The key support and resistance levels can be:
- Previous low and high (previous daily low, daily high, monthly low, monthly high, etc.)
- Fibonacci levels
- Pivot point levels
- Price channel
- Andrews Pitchfork channel
- Supply and demand areas
- Moving averages
- Custom indicators
People are surprised when they see that moving average can be used as a support level or resistance level. A widely used analytical measure is moving averages. It helps in smoothing the uncertainty and assist in understanding and validate price behavior perception. Moving averages can be implemented to validate or facilitate the understanding of support or resistance levels and evaluate main levels for continuity and reversal of patterns.
Simple and exponential are the two common moving averages being used.
- Simple – It takes the closing rate over a fixed time duration and calculates the moving average offered to every rate point with equal weight. It gives a late signal than a moving average of exponentials.
- Exponential – It takes the closing rate measured for a particular time; the moving average is calculated by assigning greater weight to the existing price points. It gives a signal earlier than a simple moving average.
Moving averages can be used, just like any other technical indicators, combined with other indicators. Usually, traders use Moving averages with periods 10, 20, 50, 100, and 200 as support and resistance levels. The longer the duration, the greater the future value of it. A moving average of 200 periods would have a greater impact than a period of 10.
A change in signal from the 200 moving average would be less important than a daily chart on an intraday chart. Markets are dynamic, and history does repeat itself. Just like that, moving averages are dynamic with their usage at any given time or chart.
It would help if you decided about the time span you are attempting to trade– short, moderate, or long term to determine which period you can choose. The short-term intervals are 25 or fewer days, the mid-period is 25 to 100 days, and last but not least, long-term periods are said to be 100 to 200 days.
With practice and persistence, you would soon master the concepts and will be able to trade with confidence.
The main idea is not to describe ways of how we can determine and draw support and resistance levels. The main goal of this article was to explain that all time frames were important for trading decisions.