A method for constructing support and resistance levels
Often seen as the price to reach a particular area, all of a sudden turns in the opposite direction. For amateurs Forex market uninformed in some intricacies of technical analysis, this turn of events can be quite unexpected.
Only having basic knowledge, such a turn would not only predictable and informative, but also allow to profit from it. Therefore, today we look at one of the most important (some would say even the most important) element of technical analysis - support / resistance levels.
Support / resistance level - it is a strategically important area for the price range, which disturbed the balance of supply and demand, with the result that the market there is a predominance of either buyers or sellers, and there is a price reversal. Of course, this definition is quite relative. In order to learn in more detail what is a support / resistance levels let us look at the principle of the formation of these levels.
It can be characterized by the dynamics of the whole education support / resistance levels as follows. The foreign exchange market is subject to constant fluctuations, with the result that there is a constant movement of the price. But at some point the Bulls Power, or bears running out, and any of them takes the initiative in their hands. The result is a reversal of the current trend. Over time, the price can come back to that level, so if this happens, then that level becomes increasingly important for traders. They give it a special meaning. Here's the deal even more in psychology. This is due to the fact that many merchants were the same school and technical analysis in accordance with this act equally, hence, the S / R levels are also constructed identically. And if so, when approaching the prices to a certain level which is marked by most traders as a support or resistance level, everyone is starting to buy anything (if the price approaches the level of support) or sell (if the price is appropriate to the level of resistance), therefore the price is set and It goes in the opposite direction.
Quite often it happens that due to the release of any fundamental news, the latter is given more importance than the support / resistance levels, causing the price breaks the level. After breaking through the level of support / resistance price often comes back, but if it does not, then, for example, a former resistance level may be the level of support and vice versa.
Figure 1 shows an example of how the levels of support / resistance work. The first and third levels from the top are the levels of resistance. You can see that he was twice confirmed by the first bullish candle, then a bear. By the way, once it is necessary to say that, as seen in the graph can not determine a specific point, where will hang on the level. Classically support / resistance levels should be carried out not at the highest or lowest point, and in places where extremes. Therefore, it turns on the graph, that in some places there are punctures levels. The second and fourth from the top levels are levels of support / resistance.
Fig. 1
Among other things, the knowledge of a technique of construction of support / resistance levels is key, because if you make a mistake in their construction, it is likely that lose a significant portion of your capital, and perhaps the whole. Therefore, the study of the subject is emphasized.
In addition, the importance of identifying support and resistance levels plays a critical role in many (but not all) trading systems. And the reliability and efficiency of , first of all, depends on well-chosen setpoint. And these values in the context of the topic before us is a key support / resistance levels. So, the capitalists, the method of constructing these elements, pay close attention.
Go further. Figure 1 graphically presented to you, how to construct the support and resistance levels, but in fact, all of this - the tip of the iceberg. Let's dig a little deeper. The above-described method of constructing lines of support and resistance characteristic of a sideways trend, so the construction of this kind is preferably used with respect to a lateral trend.
As for the upward and downward trend, the situation is somewhat different. Figure 2 graphically shows how the support and are constructed for the uplink line resistance (in the first case) and downward (second case) trend. In the first case presented an upward trend. It can be seen from the rising support line. The breaking of this line will indicate a possible change of direction of the trend. Mirror opposite of the situation in the second case. Here there is a downward trend. Is confirmed by a descending resistance line.
These lines are constructed using a specialized function called a channel. What is a channel? The channel is a certain period within which the price makes its fluctuations. The channel is constructed in the following manner: first line of support is determined. In the first case we did, joining a number of upward price lows, and then held it parallel the resistance line at the highest point of the price peak. Thus, we have turned shopping corridor, within which the price makes its fluctuations. Thus, it is possible to play the rebound by the price support or resistance lines. But, nevertheless, it is necessary to be very cautious and not be limited to the use of a release to confirm the level of only a support and resistance lines.
Fig. 2
Still, the question of finding the key positions, according to which it will be possible to assert that we are properly built to support and resistance lines remains very vague. Figures 1 and 2 support and resistance lines seem to be displayed, but the ignorant man is still not clear what guided us in the construction of such lines. Meanwhile, there is a separate procedure for constructing support and resistance lines. This definition of the so-called extreme points or points vibration. Consider the simplest technique for determination of these points.
Figure 3 graphically shows the situation determining points vibration. The most important thing to remember - this is what the basis of their construction are not taken prices closing or opening positions, and price extremes, that is, the maximum and minimum prices, which she did for a certain period of time. That these points are the most important. Figure 3 shows the situation of the rising price fluctuations. To determine which swings - upward or downward, it is necessary to consider some points. When the upward oscillation of each minimum price will be above the previous one, with each downward swing minimum price will be lower than the previous minimum. This can be seen in Figure 4.
Fig. 3
Fig. 4
And now summarize all the above examples in a single set of rules. Defining points vibration is the most important factor to be considered in the construction of lines of support and resistance. The above examples show how to build the necessary anchor points for a particular cycle. These cycles consist, in turn, the overall picture of the market situation. And once we have identified the point of hesitation, we will easily be able to properly build support and resistance lines.
Notice in Figure 5. Here is depicted a standard scheme for constructing points fluctuations, according to which the support and resistance levels are built. Two points that contact the top of the green line are impedance points. Accordingly, two points of contact with the bottom of the green line, are the points of support. Knowing this data can be more accurate approach to the calculation of protective orders, as well as take a correct decision regarding the opening of a position in any direction.
Fig. 5
If you carefully read the article, you might catch one nuance. We have not mentioned how the construction of the points made regarding fluctuations candles, bars, etc. There is a fairly widespread interpretation of this approach. But the most appropriate, in our view is the method of construction, when the reference point is taken to any extreme. To determine the oscillation is taken up extremum (maximum) of any spark, and then be followed by a candle with a maximum cost reached it, each of which is higher than the previous maximum price. These candles should not be less than two. That is, in its simplest form, there should be three candles, each one higher than the previous high point of which reached the candle. To determine all vibrations down is similar, only the number of candles have to be composed of successive spark (at least two), which follow the point taken as the point of reference.
This article was considered the theme definition GCP oscillations whereby constructed support and resistance. The importance of the skills of this nature can not be underestimated, because even the slightest deviation from the accepted methods of constructing the lines of support / resistance at the output, you can get 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 the long-term prospects for this technique.
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