Contents
Key Takeaways🔑
| →Identifying support and resistance levels is crucial for successful trading. |
| →Methods include local extrema, various time frames, Fibonacci retracement levels, trendlines, and moving averages. |
| →Practice and experiment with different methods to find the one that works best for your trading style. |
How do you identify support and resistance?
Identifying support and resistance is a key skill in any trader's arsenal. Support and resistance levels are the lines drawn on the price chart. Their role is to help the traders in making decisions about the best entry points. It is important to draw them in the right way if they suppose to work sufficiently.
Today, I will present some of the methods that can be used to recognise the support and resistance levels on IQ Option. These methods are:
- Local extrema
- Various time frames
- Fibonacci retracement levels
- Trendlines
- Moving averages
Identifying support and resistance with local extrema
Before you start identifying support and resistance levels, you should choose the financial instrument for this session, as well as the time frame. Now, look for the lowest and highest point on the price chart. You will mark the lowest extreme as ATL – the All Time Low. The highest peak will be ATH – the All Time High.
The second move is to identify all the lows and highs on the chart. You will mark them as HL (higher lows) and HH (higher highs) during the uptrend. When there is a downtrend the extremes will be signed as LH (lower highs) and LL (lower lows).
You have received several short horizontal lines. They all serve as the levels of support or resistance.
HLs are the support during the uptrend and LLs during the downtrend.
HHs are the resistance when the price is rising, and the LHs when it is falling.
Using various time frames
When you utilise this method to draw the support and resistance lines, the levels you receive are very reliable.
And the method demands that you change the time frame and transfer the support/resistance from there.
For example, if you are using the time frame of 15 minutes, you should set it for 1 hour and draw the lines of support and resistance. Then, change to the 4-hour time frame and mark the support and resistance there. Now, go back to your 15-minute chart. When the support or resistance corresponds to the level from the higher time frames, it is very strong.
Identifying support and resistance on several different intervals gives us a broader view of the potential turning points of the price of an asset.
Pros and Cons of Identifying Support and Resistance📈📉
Pros:
- 😃 Helps traders make informed decisions on entry and exit points
- 😃 Enhances risk management strategies
- 😃 Improves overall trading performance
- 😃 Applicable to various financial instruments and timeframes
Cons:
- 😞 Requires time and practice to master
- 😞 No single method works best for every trader or market condition
- 😞 False breakouts and breakdowns can lead to potential losses
- 😞 Reliance on past data may not always predict future trends accurately
| Method | Key Features |
|---|---|
| Local Extrema | Uses the lowest and highest points on the chart to identify support and resistance levels. |
| Various Time Frames | Incorporates different time frames to identify more reliable support and resistance levels. |
| Fibonacci Retracement Levels | Uses popular Fibonacci levels, such as 0.382 and 0.618, to anticipate potential support and resistance areas. |
| Trendlines | Connects two or more lows or highs to create dynamic support and resistance lines. |
| Moving Averages | Employs Simple and Exponential Moving Averages as dynamic support and resistance levels. |
Fibonacci retracement levels as a method of identifying support and resistance
The next method of identifying support and resistance is with the help of Fibonacci retracement levels. The most popular in the forex are 0.382 and 0.618.
When there is a sudden rise or fall in the price, you can usually expect it will soon retrace. And you will notice, that often it reaches Fibonacci levels on these occasions.
Look at the exemplary chart beneath. There was a long downtrend and at some point, the price has started to retrace. It has reached the 0.382 level, which acted, in this case, as the resistance line. Then, the price went down for a while until it retraces again up to the 0.5 level. This is the way of using Fibonacci retracement levels as support/resistance.
Trendlines
A trendline is a line that you receive by joining two or more lows during the uptrend or highs in the downtrend. The more lows or highs you connect, the more valuable trendline.
As such, the trendline can be considered the support when there is a rise in the price, and the resistance when the price is dropping. When you take a look at the chart, you will notice that the price tends to not to go beyond the trendline.
In case of the sideways trend, the trendlines as the support or resistance levels are even stronger because the price is testing these levels numerous times.
Moving averages
The Simple Moving Average, as well as the Exponential Moving Average, will work well as the method of identifying support and resistance levels. Try different periods to discover what works best. For example, you can choose a 20-day and 55-day moving averages and compare the results.
The method is simple. You do not have to take any other action like to add the moving average to the chart. It will function as dynamic support and resistance. The line is moving and so are the support/resistance levels.
When there is a downtrend, the moving average can be considered as a dynamic resistance. Look at the chart. The price is reaching the EMA55 and then falls further down.
When there is an uptrend, the moving average will form dynamic support. The price is nearing, sometimes even touching the line, but then it goes further up.
Very often the SMA200 and EMA200 are used as the best support and resistance indicator. Many traders observe these two long-term averages, hence their significant forecasting value. This is why the price often stops or bounces when reaching these two averages.
Summing-up
Traders are using support and resistance lines very commonly. To be able to identify them is a valuable skill. You now know several ways to do it. You can use local extreme, various time frames, Fibonacci retracement levels, trendlines or moving averages.
The choice which method to use is yours. You can also try a few at the same time. Like this, you will get a confirmation and the support/resistance will be stronger.
Remember, the IQ Option platform offers a free demo account. Use it to try all the methods described in this article and choose what suits you best.
I encourage you to leave a comment about identifying support and resistance levels and which method you use in the comments section below.
Enjoy trading!
Q&A: Support and Resistance
- Q: How do I know if a support or resistance level is strong enough to rely on?
- A: Look for levels that have been tested multiple times and have held. The more times a level has been tested and held, the stronger it becomes.
- Q: Can I combine different methods to identify support and resistance?
- A: Yes, combining methods can offer more reliable support and resistance levels, as it provides confirmation and strengthens the overall analysis.
- Q: How do I manage false breakouts and breakdowns when using support and resistance levels?
- A: Employ risk management strategies, such as setting stop-loss orders and using proper position sizing to limit potential losses from false breakouts and breakdowns.
- Q: How often should I update my support and resistance levels?
- A: Regularly update your levels as market conditions change. The frequency depends on your trading style and the time frame you are trading on.
- Q: Can I use support and resistance levels for long-term investing?
- A: Yes, support and resistance levels can be used for long-term investing, but ensure you adjust the time frame of your analysis accordingly to identify relevant levels.