Support and Resistance is one another extremely useful tool in trading and one that I don’t think gets the attention it deserves. If I was told I could choose just one indicator to use, I think it would probably be support and resistance. The reason for this is because support and resistance give so much information about the market.
The concept is very easy. These are prices where the market thinks things have got too expensive, or too cheap and then reacts on the back of that. In other words, support and resistance levels identify price levels where historically the price has reacted by reversing. These price levels are considered clues for future price behavior.
The market might be running higher, it hits a price and bounces back lower, this is the resistance where selling overwhelms buying and the price increase stops, you might look to place a sell position.
Likewise, the market sells off hits a resistance point bounces back, this is the support where buyers overwhelm sellers and the price reverses you might look to buy.
It also helps to remember that support and resistance are not exact numbers, but think of them more as a zone, sometimes the price can move a little past the support or resistance price but then still bounce. Don’t confuse testing support with breaking support.
So, why do we often see these resistance and support levels come at round numbers?
This basically comes down to the fact that we as humans prefer to deal with round numbers, for example, it’s unusual to put an order in for £3.04, you and the rest of the market are much more likely to put an order in for£3. This is just easier to calculate, and this is easier to think about. Therefore, as humans, we tend to gravitate towards whole round numbers and why we often see support and resistance levels form at these levels.
When looking at the volumes in markets you will often find that there are a large number of people waiting to buy and sell at these numbers.
Drawing Support and Resistance Levels
Starting out, it could actually be easier to use a line graph rather than a candlestick chart. This is because the candlestick chart brings the extreme highs and extreme lows into the picture, rather than just the closing prices, as with the line chart. But then once you’re comfortable with the concept the candlestick chart contains more information.
Looking at the chart identify levels where several peaks or valleys form. Draw a line and this is the support or resistance zone.
This can be done on the charts offered by Vantage FX including the world-renowned MT4 account which Vantage FX offers its clients. Information on how to use the charts can be found on this website.
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