Forex strategies based on support and resistance levels. Trading from resistance and support levels

In technical analysis, these are support and resistance levels. It is these TA concepts that make it possible to identify true market movements (trends), receive signals of the beginning and end of a price impulse, and also lay the foundation for our future trading strategy.

Definition of levels

Support and resistance levels are usually called local price minimums and maximums.

The area of ​​prices at which a number of trading participants become motivated to buy is usually called the support level (zone). Accordingly, the resistance level is the price area on the chart, upon reaching which a number of participants have incentives to sell, thereby stopping or delaying further growth.

Fig.1: Support and resistance levels

Accordingly, to speak of an uptrend, each subsequent decline (support level) and each subsequent peak (resistance level) must be higher than the previous ones. If the next corrective decline reaches the level of the previous one, then this may be the first sign of a possible end to the upward trend. The opposite will be true for a downward trend.

When a “strong” level of support or resistance is overcome by a certain amount, they change roles: when the resistance level is broken, it becomes support, when the support level is broken, it becomes resistance. This happens due to the psychological characteristics of “crowd behavior”, which, in fact, are the main factors in the formation of various graphic signals, including levels.

Psychology

For greater clarity, we will divide all market participants into three categories: bulls (currently buying), bears (currently selling) and “undecided”.

Suppose that for some time prices fluctuated at the support level, and then the market began to move up. Those who bought at prices near the support level are rejoicing, although they regret that they did not buy more - if the market returned to the previous support level, went down a little, they would immediately buy more.

Those who sold realize that the choice of direction of trade was made incorrectly. The natural desire in such a situation is to return the price to the original level, which will allow you to close open positions for sale and remain “at your own” (this is the so-called breakeven level, breakeven point, or breakeven point).

Those who could not decide which side to join realized that prices had gone up and decided for themselves that at the first suitable opportunity they would play for an increase.

So, all three groups of market participants are committed to buying in the next downturn. Below-market support is priority number one. That is why, when prices drop to this level, the renewed rush to buy, with which all trading participants are burning, will again spur up prices, and they will go up.

Now let's consider the opposite situation. Let's assume that prices, instead of going up, went down and fell below the support level. The reaction of market participants will also change exactly the opposite. All those who bought at the support level clearly realize what a stupid thing they did. Thus, support turned into resistance. And, accordingly, the more significant the previous support level was, the more significant it becomes as a resistance level.

Working method

Support and resistance levels, in their essence, reflect the basic elementary principles of behavior of most trading participants. Therefore, regardless of the chosen direction, investment horizon, number of transactions and other personal preferences, any strategy (based on TA methods) will inevitably focus on price movements in such “critical” zones. The support level gives impulse to purchases until it goes down. As soon as this happens, it means that the number of sellers significantly exceeds the number of people willing to buy, and accordingly, the downward movement receives its impetus.

Moreover, the trading system does not necessarily have to exploit only one of the impulses (only “for a rebound” or only “for a breakout”). We can trade as we prefer and in accordance with the results of our tests.

1. « On the rebound» from the level: buying when the price drops to the support level or selling when the price rises to the resistance level. This method is often used for. The main specificity of trading is that positions are opened on a rebound from key levels, and closed, as a rule, according to indicator signals.

2. « For a breakdown» level: we sell as soon as prices push through the support level, or buy when prices overcome the resistance level. Breakout strategies are used for trend trading. That is, when there is a strong trend in the market, the optimal trading decision is to open a position “with the trend” when prices leave short-term consolidation zones, which is usually accompanied by resistance (or support).

3. Mix: trading occurs on a rebound from the level when the price approaches support/resistance levels, however, if the price overcomes these levels, positions are closed and opposite ones are opened. This method allows you to conduct high-frequency trading sideways, and when a strong trend is formed, you can rebuild and participate in trend movements.

Example

As an illustration, consider the current price dynamics for (1 candle - 1 day).

On June 4, prices showed a local maximum at 1,758 rubles per share. After which prices remained lower for about two weeks. With the next growth to a level we determined, we could open a short position (if such actions are included in our trading strategy).

The decline continued for another week. Where to close an open position is up to everyone to decide for themselves. However, if the position remains open, at the moment the resistance level is broken, it becomes obvious that the growing up-trend will not allow us to make a profit on this position in the near future. It is closed, and at the same time we open a long position.

The resistance level now becomes a support level. It is when this level is broken that we can talk about the end of growth.

Fig.2: LUKOIL (June-July 2012)

After prices approached the level of 1,858 rubles per share for the second time, it made sense to close some of the long positions, because a new resistance level had formed. If the position was closed completely, it seemed quite reasonable to open a reverse position - to sell.

If in the near future prices overcome the level of 1860 rubles, the short position will have to be liquidated and again follow the trend. On the other hand, we can start taking profits when the price reaches the underlying support level.

Conclusion

When studying materials on the basics of technical analysis, you need to clearly understand two things. Firstly, we are still at the very beginning of our journey from “interested in trading on the stock exchange” to “receiving a stable income through investments in securities" You can make a profit, large or small, without any knowledge at all, simply by intuitively guessing the direction of further price movement. However, the stability of such income will come only after we begin to understand the key aspects of trading, the main factors influencing the price, and also systematize our strategy.

And, secondly, knowing the theoretical foundations of support and resistance levels and, more importantly, having the skills to construct levels on a price chart, we lay the foundation for our future strategy. This foundation will help us in any situation to understand where the market is going, where large volumes of buy or sell orders are located, and make timely, correct decisions.

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Trading by levels

Levels are one of the most universal elements of graphical analysis, which can be used regardless of the type of trading system. You can trade using candlestick analysis, moving average crossovers, or using an insanely large number of indicators, but regardless of this, levels are always in play. But a more interesting fact is that a trader may not know a single type of analysis or a single indicator (which is, of course, undesirable) - and at the same time successfully trade at resistance and support levels.

It is these trading signals that we will use in our trading system. This strategy is applicable on time periods from M1 to MN both in the Forex market, futures and stocks. It is impossible to trade orders without knowing the levels, because it is the knowledge of price levels that gives the trader a foothold. Placing orders based on your own financial capabilities or expectations is, at the very least, unreasonable and, at most, dangerous.

Let us highlight three main groups of movements suitable for concluding transactions near critical levels:

1.Level from the level.

2. Level breakdown.

3. False breakout.

• trades from resistance and support levels. Rebound from the level;

Based on the name of the trading method, we will enter the market after the price rebounds from the support or resistance level. Here you should not make the mistake of placing an order directly at the support or resistance levels themselves. When we trade a rebound, we want to find a balance between potential profit and risk, given that the price will move in the opposite direction from the level. Therefore, we need confirmation that this level will withstand the onslaught of the market. Instead of opening a position immediately when the level is touched, you should wait until the price bounces off the level and only then open a trade. Market wisdom says that catching a falling knife is very dangerous...

• transactions when passing resistance and support levels. Level breakdown;

There are no levels that are 100% likely to withstand the onslaught of price movement, so trading only rebounds from levels is not enough to win. Support and resistance levels are often broken, which is usually followed by an accelerated movement beyond the level. It is important to know what to do when price breaks support and resistance levels. There are two approaches to trading breakouts: aggressive and conservative.

Aggressive approach

The easiest way to trade breakouts is to buy and sell whenever the price moves firmly through the support and resistance zone. In this case, we should expect a sharp impulse movement beyond the level. If the price has passed the resistance zone but there has been no strong movement, then we need to close the position. We will analyze the reasons for strong movements from levels later.

Conservative approach

After the breakout, many traders begin to sell their unprofitable positions, and the price falls, but after closing long positions, the balance of supply and demand returns and the price rebounds a little and comes close to the broken level and begins to fall again. This is one of the reasons why support levels become resistance after a breakout and vice versa.

To take advantage of this phenomenon, you need to be patient. Instead of entering a position immediately after a breakout, you wait for a pullback to the broken support or resistance level and enter a position immediately after the rebound from that level.

It is important to take into account one important circumstance here. “Retests” of broken support and resistance levels do not happen all the time. There will be times when the price, after a breakout, will move in one direction without pullbacks.

• false breakout

A false breakout is one of the most unpleasant things for a trader, which has caused many losing trades and millions of people around the world fall into the trap every day.

False breakout – this is a breakout of the support/resistance level by the asset price chart, when the asset price cannot gain a foothold at the achieved level and rolls back, and this happens within one candle.

All market movements represent the formation of levels, as well as breakouts (or rollbacks) from them. False breakdown is the most interesting because it allows you to enter the market at the point of minimum risk and maximum potential for profit.

Classic false level breakout represents bullish and bearish traps at resistance and support levels. Such traps are patterns of 1-4 bars (candles), which can be defined as a false breakout of a support/resistance level. Most often, this happens during a directional long-term movement and prices approach key levels. Many of the traders in this kind of situation think that since the price has begun to approach very aggressively, it means that a breakout will occur, so they begin to sell or buy at the breakout, but the market often begins to reverse, and players suffer losses.

Types of “false breakouts”
1. Trap in the form of a classic bull and bear at key market levels
Trap - A bullish pattern, typically a 1 to 4 bar pattern, which is defined as a “false breakout” of a key market level. These "false breakouts" occur after large directional moves as the market approaches a key level. Most traders tend to think that a level will break out just because the market has approached it aggressively, they will then be able to buy or sell the "breakout" and then many times the market will trick them into creating a bullish or bearish trap.
A bull trap forms after a move up, amateurs who are simply watching for major changes cannot stand the temptation and they enter the market above or at a key resistance level because they feel confident that the market is anticipating momentum to break higher. The market then stops just above the level and fills all the breakout orders, and then drops lower as experienced players come in and push the market lower, leaving amateurs trapped in a losing long position.

2. Consolidation of “False Breakouts”
Consolidations of “False Breaks” or trading ranges are very common. It is very easy to fall into the trap of waiting for a breakout of a trading range, only to see it turn back into the range. The best way To avoid this trap, simply wait until there is clear data outside the trading range on the daily chart, and then you can start looking for price action signals to trade in the direction of the breakout.

False breakouts can create long-term trends.
You need to pay attention to the “tails” of candles that appear directly or near key levels in the market. How do prices react during each day's session, or where do they close? The most important level of the day occurs at the close, and often if the market fails to close beyond a key level, this can signal significant "false breakouts". Often there is an attempt to break out of prices in the market, but by the close of the day the price has rejected this level, showing a “false breakout” or testing the “false breakout” level. A market failure to close an off-limits key market level can result in a big comeback or trend change. Thus, the closing of the price bar is the most important level.

Traders who cannot anticipate and identify deceptive situations or “false breakouts” in the market will lose their money to those who can. If you pay attention to the price behavior at key levels on the daily chart, you can clearly see “false breakouts”.

Finally.

It is good to sell from the resistance level, and to buy from the support level. When the resistance level is broken, it is good to buy, and when the support level is broken, it is good to sell. In any case, it is better to make trades in the direction of the prevailing trend. Trades when passing resistance and support levels. Such transactions are usually made when the price leaves the consolidation zone. The exit from the consolidation zone should not only be abrupt, but also very significant. Buy when passing a resistance level Trades from resistance and support levels. These transactions are made in the expectation that the levels will hold, which is what happens to them in most cases. At the same time, it should be noted that almost always transactions from levels are made against local, short-term movement. After all, if you decide to buy from a support level, the market is almost always above this level and you must first wait for the price to decline. The same is true the other way around when you sell from a resistance level. Buying from a support level after a false breakout of this level A false breakout of a support or resistance level is a price movement in which the exit from the level was short-lived, when the price was unable to gain a foothold at the new price level. This is usually explained by the speculative nature of price movements, played out by some market participants or arising under the influence of short-term factors. In the event of objective fundamental reasons, the price in the vast majority of cases carries out a transition of prices to a new level, reflecting new important information entering the market. Buying when passing a resistance level from this level after returning to it This trading strategy uses the rule that resistance levels after their passage usually become support levels. The advantage of this trading method is the wait-and-see position that the trader chooses. The latter waits for a confirming signal that this is not a false breakout of the level, and enters into a trade only after a second move away from the resistance level (now the support level). Selling when a support level passes from this level after returning to it This trading strategy uses the rule that support levels after their passage usually become resistance levels. Here, as in the previous example, the trader waits for a confirmation signal that the breakout is not false and enters into a trade only after a second move away from the support level (now the resistance level).

Trades in the direction of the main trend. These transactions are made exclusively in the direction of the current trend with the expectation of its continuation and usually such positions are held for a long period of time. The main reason why trades are not made from extreme levels of resistance and support or when they pass (the best from the point of view mathematical expectation), lies in the specificity of such levels.

The strategy based on support and resistance levels is accessible and understandable, and is also quite easy to use, therefore it is recommended for beginners in Forex trading.

Having understood trading based on support and resistance levels, the trader receives information about basic concepts trading, in particular, about support/resistance levels and identifying true trends with their help, and at the same time receiving clear signals of the beginning and decay of an impulse. All this is necessary to make a profit on any trading vehicle.

Basic concepts in trading by support and resistance levels

First you need to know what they are trading levels– these are located at local price extremes.

As for the price areas, upon reaching which traders have the opportunity to trade on support and resistance levels to buy, they are called support zones/levels (“support”). Levels or zones of resistance (“resistance”) are prices in the area of ​​which the majority of market participants open Sell transactions, which determines the delay or stop of the ascending trend line.

If we consider an uptrend, then each subsequent support level, as well as each subsequent resistance level, is located above the previous ones. If the next low of the price movement is equal to or lower than the previous value, then we can conclude that the upward movement may slow down or end. The situation with a downward movement develops in a similar way in a mirror image.

An example of the location of support and resistance levels in an uptrend is shown in the figure below - "S" points(1, 2 and 3) indicate support levels, respectively "R"(1, 2 and 3) are resistance levels.

If there is a trend, the Support and Resistance levels move in the direction of the price movement, while during a flat movement they are located on horizontal lines. When one of the “strong” levels is beaten by the price, their roles change. For example, when a support level is broken, it goes into the Resistance category and vice versa. All this happens due to the presence of certain psychological characteristics among Forex players. “Crowd behavior”, in fact, is the main factor in the transition from Support to Resistance and vice versa.

Psychological factors in the formation of levels

First, you should evaluate the traders who are in the market. All of them can be divided into 3 groups:

• Bears that are working for a fall.
• Bulls who place buy orders.
• The so-called “undecided”, who have not yet entered the market.

To understand the psychology of trading in support and resistance trading, you need to consider the following example. Let market price fluctuates near the Support level and at this moment an upward trend movement begins in the market. Bulls experience positive emotions and even regret a little that they did not buy more, and therefore want the price to return to its previous level or even a little lower - they will be able to buy even more assets.

As for the bears, for them such a market movement is unprofitable, so for them a price reduction would also be preferable. This would reduce their losses; ideally, the price should drop to the original value in order to move trades to breakeven and close them with minimal losses or without losing any money from the trading deposit.

The undecided category is finally determined and decides to follow the trend, that is, opens trades in BUY. As a result, the entire mass of traders intend to buy assets when prices roll back to the former Resistance level. If the price actually decreases slightly, there is an increased demand for the purchase of an asset - the excitement in the market stimulates growth, and the chart begins to rise. In a similar way, but in mirror terms, the situation develops if the price goes down and breaks through the Resistance line, which turns into Support.

Trading strategies based on support and resistance levels

Since the behavior of traders is a consequence of behavioral signs in the crowd, the strategy based on support and resistance levels is quite realistic even without additional indicators. In any case, the trader must focus on price movement within significant extremes.

Let's consider possible strategy options:

• Trading by support and resistance levels on a rebound or rebound from the level– in this case, the trader opens trades hoping for a price rebound from an important level, be it Support or Resistance. Closing of such orders is carried out according to the signal of an indicator, for example, Stochastic. As for drawing levels, you can do it manually or use any free indicator with such functionality for a strategy based on support and resistance levels. After downloading the indicator, copy it to the MQL4-Indicator folder, restart the trading platform and install the indicator on the chart.

• Trading at support and resistance levels for a breakout is also characterized by simple principles - we enter the market when the price breaks through a strong Support or Resistance level, respectively, we open Sell or Buy trades. This trading option is relevant for currency pairs with strong trend movements. By entering the market at the beginning of a trend, a player can make a good profit. As for exiting trades in strategies based on support and resistance levels, you can use a trailing stop or also use some kind of filter indicator, for example, Stochastic.

• Another type of trading based on support and resistance levels is a mixed option, where you can use both a rebound and a breakout. This approach guarantees the trader a large number of orders even during a sideways trend, not to mention trend impulses.

Strategies based on support and resistance levels are extremely simple, but this simplicity hides the most important catch: in order to consistently make a profit from Forex trading using one of the options presented, you must have the skills to construct levels, as well as know the theoretical foundations of the market. Only in this case can a trader count on a stable profit, and not on periodic success due to the randomness of predicting the direction of the trend. Professional traders often use levels, but in combination with more complex indicators. Elements of trading based on support and resistance levels are found in many trading systems, so it is important to understand theoretical foundations technical analysis of the market, which is the basis of such a strategy, which will create a more profitable and stable vehicle.

Today we will try to figure out what is trading from support and resistance levels.

Even if you are a novice trader, you have still noticed how the market, moving in a certain direction, at one point seems to hit a wall that it cannot overcome.

After such a situation, there is a high probability of a price rollback, after which, having hit a new wall, the price again tries to break through the early line and, if it succeeds, a strong jerk is observed in the market.

This situation arises due to support and resistance levels, and the main pattern of the market is that the price moves from level to level, while resistance, at one point, becomes support and vice versa.

Let's consider two methods of trading options from levels- indicator and non-indicator...

By trading binary options from levels, you will find the most profitable moments to enter the market, because the price near them is always active and they are the point from which the price movement gains momentum!

Many novice traders do not attach importance to them, however, as my practice shows, a lack of understanding of the basics of price movement and graphical analysis always ends badly for the trader.

The main feature of trading from levels is that they work on all possible assets and currency pairs, as well as timeframes, and by adding them to your strategy, you can easily calculate probable goals.

Benefits of Options Trading from Levels

The Forex market represents a certain amount of money that passes from one hand to another. It is precisely this transition, since there is only one product in this market - money!

You, as a trader, take money with your decision (if it is correct) from other traders. If wrong, then others take money from you! Yes, it's time to open your eyes and know when you are making money, someone lost money and gave you the opportunity to take it back -)

At this point it is important to understand one thing simple thing- although we trade binary options, in fact the market is ruled by large players who trade Forex. That is, we trade from the expiration of options, and Forex traders trade from take profits and stop losses!

It is as a result of traders placing protective orders that seemingly invisible price levels appear on our charts.

And, since everyone learns from practically the same textbooks, albeit at different languages and in different countries, but the principle of installing protective orders is fundamentally the same for everyone.

The most popular places for setting stops are points, either at local highs and lows, or at the highs and lows of the signal candle, the closing price of the opening of the day.

In order to take money from a player, it is necessary to knock him out of the market, that is, to disrupt his stop orders. That is why the price moves from level to level. I think the principle is clear? By trading binary options from levels, we can collect many times more profit, rather than Forex traders.

While the price knocks out their stops and reverses, we collect the cream at this reversal by correctly calculating the expiration of the options we trade -)

Options for constructing support and resistance levels

There are two ways to determine support and resistance levels, namely graphically and mathematically. Both approaches have merit, and their levels are equally valid, since these methods are used by the general public.

Graphic construction of levels

It is quite simple to build levels for trading yourself - you will need such a simple tool as horizontal lines, which is available in any MT4 terminal.

In order to confidently draw a line and claim that this is a support or resistance level, you need to find at least several points of conditional contact when the price repeatedly approached it and fought back from it.

• Support level– this is the level that is below the price and acts as a springboard from which the price rebounds towards the bullish trend. On the chart it is determined by the lower tails and/or bodies of the candles;
• Resistance level– this is the level that the price is trying to overcome. It is plotted on the chart at the tops of the candles.
• When the price breaks through the support level, it becomes a resistance level. And vice versa.

An example of marking levels manually, see below (the numbers show the points at which the levels are drawn):

It is important to understand that each level has its own weight and strength. This depends on the timeframe on which the levels are tracked and on the frequency of its breakdown by the price.

And, the more often the price tried to break through the level, but could not (the more points on the basis of which the construction takes place), the stronger it becomes.

Mathematical construction of levels

The mathematical approach to building levels means the use of technical indicators...

As a rule, levels are built using two methods, namely:

1. Trading using Murray levels, which is actually what the indicator is called;
2. Trading from levels using Pivot points.

An example of constructing levels of the Murray indicator is shown below:

You can download the Murray indicator from this link... You can learn how to install indicators in the MT4 terminal from this article...

Trading from rebound or breakout levels

There are only two options for trading by levels, namely:

1. On a rebound from the resistance/support level;
2. To break through the resistance/support level.

Breakouts of strong levels are not so common and can be deceptive, but if you correctly identify the breakout, you can make very good money. Especially if you have available or strategies in your arsenal.

Rebound from a level of more than common occurrence. However, you should not lump all levels with the same brush. In practice, weak levels are most often broken through, and the price passes through them like a knife through butter.

The price most often rebounds from strong levels, but at a certain moment, against the backdrop of economic news, you will be able to observe their breakthrough, which in most cases will be false.

Exactly Therefore, trading based on levels is important to use in conjunction with other instruments.

For example, for trading options based on levels, oscillators such as oscillators, which are included in many strategies, such as this one, are excellent. Or the RSI indicator, which is also a frequent inhabitant of many binary options trading strategies.

Trading strategy based on levels

As an example, I propose to consider a very simple strategy for trading options from levels based on a stochastic oscillator:

• We buy an option to increase if the price has approached the level from top to bottom, and the stochastic oscillator is in the oversold zone (from 0 to 20);
• We buy a downside option if the price has approached the level from bottom to top, and the stochastic oscillator is in the overbought zone (from 80 to 100).

In conclusion, it is worth noting that trading from support/resistance levels is the base, which every trader should master on a subconscious level, because it is the levels that allow you to see the further potential of the movement, its direction and, most importantly, the turning points.

You can enter into transactions using both market and . For example, the price is moving down, and there is a support zone on its way. You can set a pending Buy Limit order in advance, or you can wait until the price reaches a horizontal level in order to decide on the spot whether to enter into a trade or not. The best option would be to have confirming setups, for example, a pin bar - a candle with a small body and a large tail that pierces a given level. The price seems to be testing the level, trying to break through it, but bouncing away from it. If the candle closes below the level, then you cannot enter on a rebound from it, as it will most likely be . It is advisable that the price tests the level at least twice before entering a trade. The more bounces from the level, the stronger it is. Stop losses can be placed behind support and resistance zones. The indicator is convenient because it marks levels on the chart not with horizontal lines, but with zones, so there should be no problems with setting stop losses. But the goals for taking profit can be either other levels that stand in the way of the price, or multiplying the stop loss by two or three times. You should also take into account the direction of the trend and the presence of a flat in the market. If you are trading, then the goals for taking profit should be minimal, otherwise the price may reverse and continue its movement along the trend.

conclusions

Unlike most similar indicators, SR_zones shows only strong levels, without cluttering the chart with unnecessary lines. Therefore, working with such an indicator is much simpler and easier, and trading by levels is effective and profitable. The SR_zones indicator is ready for use and does not require additional settings. Of course, losing trades are inevitable, as in any other trading system, and you need to be prepared for this, but what is important is not the absence of losses, but a positive result for the reporting period. And trading at support levels shows good results and will always be relevant, no matter how much the market changes.

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