Support And Resistance Levels Explained

The more often a price hits either level, the more reliable that level is likely to be in predicting future price movements. It often happens that both levels become psychological barriers for traders, as they tend to buy or sell once a level is reached. This only strengthens the result.

If a price touches or breaks through a support or resistance level but jumps back fairly quickly, it is only testing that level. But if a price breaks through any given level for a longer period of time, it is likely to keep rising or falling until a new support or resistance level is established.

How to identify support and resistance level
There are a few ways to identify support and resistance levels. It’s quite easy to spot these levels, but they can be very useful in helping you choose the best time to enter a market, as well as where to put your stops and limits. To identify support and resistance levels, traders can look at:

1. Historical price data
The most reliable source for identifying support and resistance levels is historical prices, making them invaluable to traders. The key is to familiarise yourself with past patterns – sometimes from very recent activity – so you can recognise them if they appear again. However, it is important to remember that past patterns may have formed under different circumstances, so they are not always a reliable indicator.

2. Previous support and resistance levels
You can use previous notable support or resistance levels as markers for possible entry and exit points, as well as indicators of future movement. It’s important to note that major support and resistance levels are rarely exact figures. It’s unusual for a market to hit exactly the same price time after time before reversing, so it’s probably more useful to think of them as support or resistance zones.

3. Technical indicators
Technical indicators or trendlines – such as the ones covered later in this article – can provide dynamic support or resistance levels that move as the chart progresses. Support and resistance levels for different markets will often be based on different factors, so developing the ability to recognise which levels are going to impact a market’s price can take time. For that reason, it is important to practise identifying support or resistance levels using historical charts.

How to draw support and resistance lines

To draw support and resistance lines on a chart, you first have to find them by using one of the following methods:

* Peaks and troughs
* Support and resistance levels from a previous timeframe
* Moving averages
* Trend lines

These are covered in detail in the sections that follow. To establish the strength of the support and resistance lines, you can combine these methods.

Peaks and troughs
To draw your lines using peaks and troughs, select your timeframe, then identify the highest peak on the chart and do the same with the lowest point. Mark each peak and trough. If there is a downtrend, the support level will be the lower-low peak and the resistance level will be the lower-high peak. Conversely, if there is an upward trend the support level will be the higher-low peak and the resistance level will be the higher-high peak.