When unexperienced traders and beginners open up their trading platform in the morning, most of them will only see choppy and unconnected price behaviour on the screen. Experienced traders, on the other hand, will immediately try to identify various price patterns, trends, swing highs and lows, and potential support and resistance zones.
Unexperienced eyes tend to perceive market behaviour as irrational and messy, but the truth is that most of the price action can be systematised into organised patterns and movements. One of these patterns is support and resistance zones, which form in both trending and ranging markets. Each time the price makes a swing high or low, the resulting peaks and troughs can be marked as resistance and support zones, respectively. This article will shed some light on the most important types of support and resistance that every trader should know.
Traditional swing highs and lows
Traditional swing highs and lows are the simplest and arguably most important support and resistance zones out there. They can be easily spotted on higher timeframes, such as the daily, weekly, or even monthly, as zones where the price made a swing high and turned lower, or made a swing low and turned higher. By simply drawing a horizontal line at the peak and trough, we can mark those price levels as support and resistance zones. Please note that some sources use the terms “zones” while others use the term “lines”. While support and resistance lines give a more precise price reading, markets rarely hit exactly that level. Rather, prices tend to trade in the “zone” before breaking the zone or reversing.
Support and resistance based on traditional swing highs and lows are shown on the next chart.
As you can see, resistances form on swing highs and prevent the price from breaking up, while supports form on swing lows and prevent the price from breaking down. However, once those levels break, they change their nature and resistances become supports, while supports become resistances.
Once we identify support and resistance lines (or zones) on the weekly and monthly charts, we can then move on to the daily chart to identify further support and resistance levels that couldn’t be spotted on the higher timeframes. It’s very important to first draw support and resistance lines on higher timeframes and then zoom down to lower ones to get a broader picture and mark zones that aren’t visible on lower timeframes, but nonetheless carry very high importance.
Stepping swing point levels in trends
The next type of support and resistance that we’ll cover are stepping swing point levels. These support and resistance levels form during upwards and downwards trends. The best way to trade on them is to mark these levels as soon as they form. This is how I usually do it, and this helps to identify possible retracements back to those levels on time; and trade the pull-backs.
Basically, with each break of a support line during a downtrend, that support line turns into a resistance and we can wait for a so called “pull-back” to that resistance line and thereby enter a high-probability short position. Similarly, with each break of a resistance line during an uptrend, that resistance turns into a support and we can enter a long position on the following pull-back. The following chart will make things much clearer.
This chart shows a downtrend with pull-backs that create sell opportunities. Some traders may choose to sell immediately with the break of a support line, but waiting for a pull-back is usually a less risky trade. Furthermore, stepping swing point levels can also be used for placing Stop Loss orders. Simply place your Stop Loss just above a previous support zone for downtrends and below a previous resistance zone for uptrends.
Swing point levels as containment and risk management
If the market starts to range, we can look to trade on swing point levels as containment. After a previous support or resistance line breaks, each dip close to that previous zone can be traded. The following image shows a ranging market, which was stuck between the support and resistance lines after the price broke above the support (then resistance) at the beginning of the chart. An additional support line formed in the middle of the range, which could act either as a profit-taking level, or for the partial closing of a position.
Dynamic support and resistance Levels
Dynamic support and resistance levels are especially interesting, because they move and change their levels with each new period. As their name implies, those levels are dynamic and are drawn by moving averages. The typical settings for moving averages to act as dynamic support and resistance levels are 50-period MAs, 100-period MAs, and 200-period MAs. While simple moving averages can also be used in this regard, exponential moving averages usually return better results as they better account for the most recent price action.
Dynamic support and resistance levels are popularly used on daily timeframes, but can also be used on higher and shorter TFs. However, one important thing to note is that less volatile markets ask for EMAs with lower-period settings, such as 50 periods or even lower; to account for the lower volatility and quickly react to small price movements.
Look at how the currency pair above reacted to the various EMA periods. The 200-period EMA is considered a very popular dynamic support/resistance zone and many traders pay close attention when the price comes close to that level. Note that the price may move far away from the 200-period EMA, which makes it necessary to switch to longer timeframes and get a “bird’s eye view” of where the current price is in relation to the EMA.
Trading range support and resistance levels
Ranging and consolidating markets can also offer great trading opportunities. In a ranging market, we can simply trade the bounce off the upper resistance line and the lower support line, and these levels can also be used for placing Stop Loss levels just above the resistance line or just below the support line.
Markets can move in trends, consolidate, and range. We have already covered how to identify and trade support and resistance zones in trending markets (stepping swing point levels in trends), and now we’ll see how to trade them in range-bound markets.
Basically, trading support and resistance levels in ranging markets is simple. We need first to identify a ranging market, which is capped by an upper resistance line and a lower support line. Once a ranging market is found, we can sell when the price approaches and bounces off the resistance line, and buy when the market approaches and bounces off the support line. This is a much better approach than trying to buy on a breakout of a resistance line, or sell on a breakout of a support line. Many traders get whipsawed over and over again trying to do this; as their Stop Loss order gets triggered after the price returns to the range. We need confirming signals that a breakout has occurred before we can trade on them. That being said, let’s take a look at what a typical trade in a ranging market would look like.
The chart above shows a ranging market with four sell opportunities and two buy opportunities. The Stop Loss orders would have been placed just above the resistance and below the support. If you tried to trade the breakouts instead; going long at the resistance and short at the support, this would generate a lot of losses in a short period of time. As you can see on right-hand side of the chart, the price broke both the lower support line and upper resistance line, creating false breakout signals only to return to the trading range again. This is one of the reasons why we want to avoid trading on the 5-minute chart shown above, and rather focus on longer term timeframes such as the H4 or daily.
Conclusion
In this article, we’ve covered the 5 most important support and resistance zones that you need to know. Support and resistance zones are the cornerstone of price action trading and every trader should know how to identify and trade on them. With a little practice, even beginners in trading should have no difficulty in spotting the types of support and resistance covered in this article.
Support and resistance zones are essentially previous price zones where the price had difficulty breaking above (resistance) or below (support) that level. All the aforementioned types of supports and resistances in this article are just derivatives of this basic premise. Another important concept to remember is that once a support zone gets broken, it becomes a resistance zone. Similarly, once a resistance zone gets broken, it becomes a support zone.
I personally favour support and resistance zones based on traditional swing highs and lows, and trading pull-backs during upwards and downwards trends. It’s straightforward to calculate the associated risk of those trades and they usually offer high-probability trades.