How To Determine Support And Resistance Points In Forex Trading
How to determine Support and Resistance points in forex? Check out the full explanation in the following article.
Determining the right Support (S) and Resistance (R) points is sometimes difficult. Why? Many reasons can be given, one of which is maybe traders don’t really know what SR is and how to determine it.
As a trader, determining Support and Resistance points is one of the basic skills that you must master. These two levels are places where there is a tendency for prices to move significantly.
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Each place has certain biases, and if the bias is in line with the wishes of market participants, then there will be movements that are often known as Breakout and Rejection.
Basic Concepts of Support and Resistance
The support point, or often known as the market ‘floor’, is defined as the lower limit of a downward movement in the market. When the price is able to reach the Support point, the bias that appears is that the price will go up again.
Vice versa, the point of Resistance or ‘Roof’ Market is defined as the upper limit of the upward movement of the market. The market will create a bearish bias when the price is able to reach this level.
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If viewed from the other side, these Support and Resistance points actually describe places where the price push occurs due to the exchange of power between the seller (seller) and the buyer (buyer).
For example, when EUR/USD drops towards a Daily Support level, a Rejection occurs which is marked by the appearance of a Pin Bar Candlestick. This rejection shows 2 things, namely:
1. Many sellers have given up their positions.
2. Many buyers have entered the market.
If connected more deeply, SR is actually related to Supply And Demand in the market. The Support point is the same as the Demand zone, while the Resistance point is the same as the Supply zone.
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Why Can There Be Support And Resistance Points?
Support and Resistance points are actually not magic places that can cause prices to move up or down. These Support and Resistance points are actually a reflection of the psychology of market participants themselves.
Market participants here are divided into 3, namely buyers, sellers, and traders who are silent or do not place any positions.
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For example, the price of a currency pair has decreased to a strong support point, then turned up significantly. The increase from this support level raises 2 types of psychology in traders, which are:
1. Fear: This fear arises from traders who have already entered a Sell position at that time. Usually, these traders hope that the price can at least fall back to the BEP so that the position can be closed, before turning into a buyer.
2. Greed: This greed arises from traders who enter Buy positions at that time. Usually, these traders regret not buying more when the price drops. They will expect the price to fall again to increase the profits from their Buy positions.
Although the two are different, each trader hopes to get a ‘second chance’ to be able to buy back the currency pair. The hope that arises from greed and fear is what causes prices to bounce at certain points in the market.
Actually, there are many ways to determine the point of Support and Resistance.
Some technical extremists even think that the price is able to stop and form 1 candlestick because there are Support and Resistance points at that level.
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However, on this occasion, we will only discuss the 3 most frequently used methods. The methods are Visual, calculation, and the use of indicators.
Determining Support and Resistance Points With Visual Observations
The first way to determine the Support and Resistance points is to connect the High/Low values. This method is one of the simplest methods in determining Support and Resistance points. Look at the image below for more details:
Simply put, you just pay attention to the points where a lot of Rejection occurs at that level. You are also free to use the Tail or Body as a benchmark to draw the line.
The more often the price is rejected from a level, the stronger the status of the Support or Resistance point.
In addition to horizontal lines, there are also other visual ways to determine the points of Support and Resistance. This method is used in drawing the Trendline Channel.
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The Upper Channel becomes the point of Resistance, while the Lower Channel becomes its Support. This approach is slightly different, given that in order for a Channel to be formed there are certain conditions that must be met.
Another visual observation of the market is the Round Number. This method of determining Support and Resistance points explains that a level with round numbers and easy to remember has the potential to be a strong level. These round numbers are also often referred to as market psychological levels.
Self-Calculating Support and Resistance Points
Another way to determine support and resistance points is to calculate them. This method is a little time-consuming if you do it yourself.
But thanks to the progress of the times, there have been many tools that provide practical calculations to produce the ideal Support and Resistance.
Calculation of Support and Resistance points with this calculation method is usually used in trading using Pivot Points. This calculation is taken from values such as High (the highest price), Close (closing price), and Low (the lowest price) on the Chart.
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The main advantage of this calculation method is that it is easy to analyze on several time frames at once. The following formulas are often used in calculating Support and Resistance points.
Pivot Point (PP) = (highest price + lowest price + closing price)/3
First Resistance Level (R1) = (2 x PP) – lowest price
First Support Level (S1) = (2 x PP) – highest price
R2 Level = PP + (highest price – lowest price)
S2 Level = PP – (highest price – lowest price)
R3 Level = highest price + 2 x (PP – lowest price)
S3 Level = lowest price – 2 x (highest price – PP)
As you can see above, the calculation base depends on the Pivot Points over a period of time. It is from this Pivot value that values such as R1 and S1 can be determined. In its use, there are also R2 and R3 and S2 and S3.
Each of these levels has a different level of validity and strength. Miraculously, these values are usually not much different from the range obtained from the visual data.
This closeness is considered to be able to eliminate subjective biases that will arise when determining Support and Resistance points visually.
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Determining Support and Resistance Points With Indicators
The easiest way to determine Support and Resistance points is to use indicators that are already available on Metatrader, as well as other trading platforms.
Indicators can be ideal Support and Resistance points because the indicators themselves are calculated and obtained from calculations that use price and time as variables, especially indicators for the first derivative of prices such as Moving Averages.
Here are some indicators that can be used to determine Support and Resistance points.
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1. Moving Average
Moving Average is an indicator that is very often used to determine Support and Resistance points, considering its position as a direct derivative of price.
Moving Average is calculated from the average price movement over a certain period of time. However, not all moving averages can also be used as support and resistance points.
The tendency is, the smaller the period of the Moving Average, the smaller the strength contained therein. Moving Averages that are famous for being effective as Support and Resistance points themselves are SMA-50, SMA-100, and SMA-200.
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2. Bollinger Bands
Bollinger Bands are another well-known indicator that is often used by traders around the world.
This indicator is often used to measure market volatility over a certain period of time. But did you know that Bollinger Bands can also be used as support and resistance points?
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Bollinger Bands are often used to determine Support and Resistance points when the fluctuations of the lines are horizontal. BB horizontally or Flat is a condition when the price is in a Sideways condition.
In a situation like this, Mid, Low and Top BB will look very flat and parallel to each other. It is at this time that the Top and Low BB lines can become Support and Resistance.
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In addition to the several methods and indicators above, there are still many ways to determine Support and Resistance points in the market.
Although there are many ways, most traders still use visuals as a benchmark in determining Support and Resistance points.
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Therefore, if you want to practice placing Support and Resistance points well, practice well your visual skills in distinguishing turning points on the chart.
Want to learn more? You can add insight and knowledge by watching the video below. This video explains in detail, how to determine strong Support and Resistance points in the market.