Support and resistance levels: Strategies for setting them


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Resistance and support levels set the parameters within which currency pairs will trade and can be a basis for quick moves of the price. A resistance level is best likened to an upper ceiling trading limit, above which a pair won’t rise. A support level, on the other hand, can be seen as the metaphorical floor. Whatever happens, the pair should not come down to below those levels – at least in theory. If the pair does go through the floor, it is assumed that it will imminently return to the support level.

These levels have a direct bearing on when to open and close trading to gain a profit. They are as relevant in the context of CFD trading tips as they are in forex. Consequently, you need to be able to set these levels accurately. Here are the best techniques for doing so.

Psychological levels

You may often hear TV financial commentary refer to psychological levels. You know it’s a psychological level when a price quote ends with 0. For example, 2.50, 90.00 and so on. These psychological levels appear as a direct result of human estimation – we like rounded-off figures. We like to say, “We’ll probably see you in 10 minutes” and not “11 minutes and 13 seconds”, even if a GPS route calculator has set 11m 13s as the exact time to complete the journey. Using this logic, traders place orders using round numbers as well, not the finer ones from technical analysis

Swing highs and lows

Swing highs are when a high price inside a price movement is achieved. While moving down or up, the price bobs upward or downward in waves, and the swing high refers to the peak prices in the waves before it retreats back again. On the other hand, a swing low refers to the bottoming out of the price in the waves before it climbs back up again.

Swing highs and lows can be found on the price chart without the need for any tools or indicators. Mark the closest highs and lows that previously occurred. You should search for lows and highs that are close to the price it is registering at that moment. Use the charts and other tools provided by your CFD brokers. Pick out the high through which it is clear the price couldn’t break and would retreat from if it did. When you see that the price has reversed from this level significantly, you know the level is strong. It won’t be an accurate level because the price will never stop its movement at the exact same place. Once you have the level, mark it with a horizontal line.

Trendline

You can never be too friendly with the trendline. Look at your chart and identify where the uptrends and downtrends sit. A trend isn’t static, so if you have a horizontal line, you don’t have a trend. Also, at least two price points need to be connected, but preferably five. Importantly, the second point on your trendline should be 20 to 30 candles away from the original one. The more times the price makes contact with the trendline, the stronger the trend is.

Pivot point indicator

A pivot point is like a swivel of a chair – after two to three price points in a trend, there’s a point that determines how the price will move from there. That’s the pivot point. If it trades above that pivot point, the movement is thought of as bullish; if not, some bear movements are on the horizon.

An advantage of this indicator is that the support/resistance levels change each time the period of the timeframe you chose ends.

Fibonacci retracements

The primary goal of Fibonacci is to find a potential correction against the overall trend. The fundamental levels of Fibonacci retracements are at 38.2%, 50%, and 61.8%. Depending on the price movement, they are the strongest resistance or support.

As always, you shouldn’t use just one technique when combining two or more would give you even more accurate results.

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