Is there an exact level where support and resistance levels should be placed?
No,
as we have already seen, support and resistance are more like “zones”
rather than “levels”. It is common however to place resistance zones
just above price action and support zones just below price action, but
some traders put them at or near price action. At times, it is difficult
to find the exact level of support or resistance; in these cases it is
valid to place support and resistance zones near price action (like we
did in charts 1 and 2).
What different methods exist to define support and resistance zones?
Based on Previous highs or lows
–
When ever the market approaches to previous highs or lows it has the
potential to act as a resistance or support (you will see this in the
next lesson on chart patterns).
Round Numbers
–
Many experts and bank traders put their orders at round numbers
(entry orders or take profit orders) because there are so many orders
around these levels that the market sometimes has some trouble getting
through them. These levels tend to have a psychological support and
resistance zones. Round numbers are 1.4500 or 1.0000, etc.
Based on Moving Averages
–
A moving average is a technical indicator that could be useful to
determine support and resistance areas (we will see MA in more detail in
the following lessons).
Based on other technical indicators
–
Other technical indicators can also be used to determine possible
support or resistance areas, en example would be Fibonacci Retracements.
From the methods above, which one is more effective?
There
is no correct answer for that question. Sometimes one methodology
forecast support and resistance levels better than the other ones. What I
recommend you is to see what is the market’s feel each day of trading,
and see what is working for that particular day (i.e. there is no case
to use round numbers as support or resistance if the market is not
taking them in consideration).
What are false breaks?
Take a look at the chart below:
This chart is the same one as Chart 2, take a close look at what happen in the red oval, the market actually traded above the support zone but it bounced back. This is what we call a false break: the market fails to trade consistently above/below a resistance or support zone.
Whenever the market approaches to a support or resistance zone, what should I do?
That depends in your situation. Here are a few scenarios:
- If you have no open positions and intend to go long, if the market approaches to a support zone, try to find a long signal.
-
If you have no open positions and intend to go short, if the market
approaches to a resistance zone, try to find a short signal.
- If you have a long position and the market approaches a resistance level, try to find an exit signal.
- If you have a short position and the market approaches to a support level, try to find an exit signal.
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