Technique of support and resistance levels
can often see how the price reaching a particular area, suddenly turns in the opposite direction. For amateurs of the Forex market, ignorant of the intricacies of some technical analysis, this turn of events can be quite unexpected.
Only a basic knowledge, such a turn would not only be predictable and informative, but also allow to profit from it. So today we look at one of the most important (one might say even the most important) element of technical analysis - support / resistance levels.
level of support / resistance - is a strategically important area of ??price range in which the imbalance of supply and demand, resulting in market dominance occurs either buyers or sellers and there is a reversal in price. Of course, this definition is rather relative. To learn more detail, what is support / resistance levels, let's see, in principle, the formation of such levels.
All the dynamics of support / resistance levels can be described as follows. Foreign exchange market is subject to constant fluctuations, resulting in a constant movement of the price. But at some point force the bulls or the bears are running dry, and any one of them takes the initiative in their hands. The result is a reversal of existing trends. Over time, the price may come back to that level, so if that happens, then this level becomes increasingly important for traders. They attach particular importance to him. Here the matter even more in psychology. This is because many traders were one and the same school of technical analysis and in accordance with this act the same, therefore, support / resistance levels and build the same way. And if so, when approaching the price to a level which is marked by most traders as support or resistance level, everyone starts to buy anything (if the price is suitable to the level of support) or sell (if the price is suitable to the level of resistance), therefore the price is set and goes in the opposite direction.
Quite often it happens that, due to release of any fundamental news, the latest is emphasized rather than levels of support / resistance, resulting in a level of price breaks. After breaking through the level of support / resistance price often comes back, but if not, then, for example, the former resistance level may be a support level and vice versa.
Figure 1 shows an example of how the support / resistance levels. The first and third levels are above the levels of resistance. You can see that he was twice confirmed by a bullish candle first, then the bear. By the way, once it is necessary to say that as seen from the plot can not determine the precise point where the window is a retreat from the level. Classically support / resistance levels should be carried out not by the highest or lowest point, and in places where extremes. So it turns on the chart, that in some places there are punctures levels. The second and fourth from the top levels are the levels of support / resistance.
Among other things, knowledge of building techniques support / resistance levels is key, because if you make a mistake in their construction, it is likely that lose a significant part of your capital, and perhaps the whole. Therefore, the study of this topic is of special importance.
In addition, the importance of determining support and resistance levels plays a critical role in many (but not all) trading systems. A reliability and performance of the trading system is primarily dependent on the well-chosen set values. And these values ??in the context of this topic we are the key support / resistance levels. So, the capitalists, the method of constructing these items, pay close attention.
Let's move on. Figure 1 graphically presented to you how to build support and resistance levels, but in reality, all this - the tip of the iceberg. Let's dig a little deeper. The above-described method of construction of support and resistance lines characteristic sideways, so the construction of this kind is preferable to apply for a lateral trend.
As for the upward and downward trend, the situation is somewhat different. Figure 2 graphically presents how to build support and resistance for the upward (in the first case) and downstream (in the second case) trend. In the first case before the uptrend. It can be seen in rising support line. The breaking of this line will mean a possible change of direction of the trend. Mirror opposite of the situation in the second. Here there is a downward trend. Confirmation is a descending line of resistance.
These lines are constructed using a specialized function, called the channel. What is a channel? Channel, it is a period within which the price makes its variations. Channel constructed by the following procedure: first line of support is determined. In the first case we have done this by combining a series of ascending price lows, and then held her parallel to the line of resistance at the highest point of the price peak. Thus, we have turned commercial corridor within which the price makes its variations. Thus, it is possible to play otboe prices from the lines of support or resistance. But, nevertheless, necessary to be very cautious and not be limited to use to confirm the all-clear from the level just support and resistance lines.
Still, the question of finding the key positions, according to which it will be possible to say that we have built right support and resistance remains very vague. Figures 1 and 2 support and resistance lines seem to be displayed, but ignorant people will still not entirely clear what we were guided in the construction of such lines. Meanwhile, there is a separate method of construction support and resistance lines. This definition of so-called extreme points or points of oscillation. Consider the simplest method to determine these points.
Figure 3 graphically presents the situation determine the swing points. The most important thing to remember that - is that the basis for their construction are not taken, or the closing price of open positions, and the price extremes, that is, the maximum and minimum prices, which she did for a certain period of time. It is these points are the most important. Figure 3 shows the situation of the rising price fluctuations. To determine the oscillation - upward or downward, it is necessary to consider some points. An upward swing every price minimum will be higher than the previous top-down swing in every price minimum will be below the previous low. This can be seen in Figure 4.
And now summarize all the above examples into a single set of rules. Definition of swing points is the most important factor to take into account when building support and resistance lines. The above examples show how to build a reference point for a given cycle. These cycles are added in turn to the general picture of the market situation. And once we have defined swing points, we can easily construct the correct support and resistance lines.
Notice in Figure 5. It outlined a scheme for constructing a standard swing points, according to which built support and resistance levels. Two points that come into contact with the upper green line are points of resistance. Accordingly, two points are in contact with the lower green line are the points of support. Knowing this data can be more accurate approach to the calculation of protective orders, and take a right decision about opening a position in any direction.
If you have read the article, you might catch a nuance. We have not mentioned, how is the construction of the swing points about the candles, bars, etc. There is a fairly common interpretation of this approach. But the most appropriate from our point of view is the method of construction, when the benchmark is taken to any extreme. To determine the vibration is taken up extreme (maximum) of any candle, and then must follow the candles with the maximum price reached it, each of which is higher than the previous price peak. These candles must be at least two. That is, in its simplest form, there should be three candles, each of which is higher than the previous high point of which reached the candle. To determine the vibration down all going the same way, only the number of candles should be composed of successive candles (at least) that follow the point taken as the reference point.
This article has addressed the topic of control points determine the fluctuations, according to which built support and resistance lines. The importance of the skills of this nature can not be underestimated, because even the slightest deviation from accepted methods of building lines of support / resistance at the output can be a big loss. As we see, this technique has a right to exist and its value lies primarily in the fact that the psychological aspect of trading does not change over time. All this speaks in favor of long-term prospects of this technique.