Contents
Key Takeaways🔑
| →Support and resistance are useful for identifying trend reversal points. |
| →Using the Relative Strength Index (RSI) in conjunction with support/resistance can improve trend reversal predictions. |
| →Practicing with a demo account can help you better understand how to use RSI and support/resistance together. |
Which indicator is best for support and resistance?
Support and resistance are a good way to identify the prices at which a trend is likely to reverse. But, they cannot effectively help you determine the direction the price will take. That is why today we write about the best indicator for support and resistance. In this guide, we'll use the Relative Strength Index (RSI) in conjunction with the support/resistance.
RSI is a momentum indicator that measures the strength of recent price changes showing overbought and oversold conditions of the underlying financial instrument.
Setting up the RSI indicator on your IQ Option account
Go to the “indicators” feature on the left of your trading interface. Next, select momentum and finally choose Relative Strength Index.
How do you indicate support and resistance?
Since there isn't a specific indicator called support/resistance, you should create one yourself by using a the line tool. Click on the graphical tools feature and then select line. To create the support, click on a low price point and drag the line connecting other low price points on the chart. To create the resistance, repeat the process of selecting the line tool. Then, click on a high price point. Hold the mouse button and drag the cursor drawing a horizontal line that connects the high price with other high price points on your chart.
RSI and support/resistance are ideal for longer trades
RSI stands for Relative Strength Index. This measures the relative strength of a specific financial instrument. RSI has value. For example, 14 RSI means the relative strength index of 14 consecutive candles. Of course, RSI is not the only indicator for support and resistance you can use.
Another concept you should understand is RSI divergence. This measures the price of an asset against its relative strength index. For example, when an asset's price rises, its relative strength index falls and vice versa. This essentially signals that the price trend will soon reverse.
Support and resistance are useful technical analysis tools. When applied, they will give you an idea about where the prices are likely to reach before a reversal occurs. When combined with RSI, they will give you an idea about an impending trend reversal. This indicator for support and resistance gives us additional confirmation.
How do you identify strong and weak support and resistance?
Which time frame is best for support and resistance levels?
Start by setting up a 5-minute candles chart for the EUR/USD pair on your account. I prefer 5-minute candles because they offer a better picture of how the markets are moving compared to smaller time frames like 1 minute or 30 seconds. Larger candles are also harder to read especially since we're going to place 15 to 30-minute trades.
Once your chart is open, set up your RSI indicator for support and resistance.
Analyze your chart and identify the support/resistance level
Using the chart below, I identified a support level where prices hit a low range and bounced back. I expected the prices to rise once more if they hit this level again.
Enter into a long-lasting position with a trade of 15 to 30 minutes
The prices eventually fell back to the support level I had identified. The RSI was rising creating a divergence (view chart). This indicated an uptrend was imminent so I went long.
It takes some bit of practice to follow these steps, especially identifying the appropriate support/resistance level. That's why I recommend using the 5-minute candles because they make it easy to identify new support/resistance levels as they come up. In my chart, coincidentally the RSI divergence occurred right where I had placed my support line. The price continued to increase allowing me to profit from my long position.
If you find this a bit overwhelming, I suggest you try it out on an IQ Option demo account. With time, you'll find that it's easier than it sounds.
Pros and Cons 🤔
- ✅ Pros:
- Combining RSI with support and resistance can improve trend reversal predictions.
- RSI can help traders identify overbought and oversold conditions.
- Support and resistance can be applied to various timeframes and trading instruments.
- ❌ Cons:
- Support and resistance levels may not always hold, leading to potential false signals.
- RSI divergence can sometimes provide misleading signals.
- It can be challenging to identify strong and weak support and resistance levels.
Interesting Facts About RSI and Support/Resistance 📊
| RSI Facts | Support/Resistance Facts |
|---|---|
| Developed by J. Welles Wilder Jr. in 1978. | Support and resistance levels are based on historical price points. |
| RSI values range from 0 to 100, with 30 and 70 typically considered oversold and overbought thresholds, respectively. | Horizontal, diagonal, and psychological levels can all act as support or resistance. |
| RSI divergence can signal potential trend reversals. | Support and resistance levels can become stronger the more often they are tested. |
Enter long-lasting sell position with a trade of 15 to 30 minutes
The price finally rebounded to the previous resistance level. Looking at the RSI, it was also falling creating a divergence. This was an indicator to enter a sell position. So I placed a sell trade lasting 15 minutes. Interestingly, the downtrend continued for quite some time.
When using RSI you shouldn't worry too much about the price touching the resistance/support level. Simply observe whether the RSI indicator is falling or rising when the price hits the resistance/support. If it's rising, there's an impending uptrend. If dropping, there's an impending downtrend.
Have you used RSI alongside support/resistance? For us, it is the best indicator for support and resistance. How did these two indicators work for you? Give us your views in the comments section below.
Good luck!
Frequently Asked Questions 💡
- Q: Can I use RSI and support/resistance on any trading instrument?
- A: Yes, RSI and support/resistance can be applied to various trading instruments, including stocks, forex, and commodities.
- Q: Which time frame is best for support and resistance levels?
- A: Support and resistance levels can be applied to any time frame, but larger time frames like daily or weekly charts can provide stronger signals.
- Q: How do I know when to enter a trade using RSI and support/resistance?
- A: Look for RSI divergence and confirmations from support/resistance levels to determine potential trade entry points.
- Q: Can RSI and support/resistance be used with other technical indicators?
- A: Yes, you can combine RSI and support/resistance with other technical indicators for additional confirmation and improved trading signals.
- Q: How do I identify strong and weak support and resistance levels?
- A: Strong support and resistance levels are often formed at significant historical price points, round numbers, or levels that have been tested multiple times.