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The basis of trading: Support and Resistance levels

The basis of trading: Support and Resistance levels

If you look at the chart of any time frame, you can notice an interesting pattern - almost always price reversals do not occur in random places, but where there was once something similar

As we already know, the market functions due to the activity of sellers and buyers, and changes in the balance between them can occur on a very different scale. This, in turn, generates fluctuations of different amplitudes - from tick to monthly trends. There is also a certain diversity and differences in the scale of operations, their goals.

For example, you can buy dollars for rubles only because you are afraid of losing money, or you can earn money by buying 64 and selling 67. Then wait for a good price again. In the first case, a person has bought and will wait, not hoping for an improvement in the situation. In the second case, there is a price at which the sale will be made, since the person does not believe in further growth and wants to repeat the operation again at a new opportunity.

Support and Resistance levels

This is a very simple example of how you can set benchmarks in the market. People pursue different goals, someone just speculates, and someone, on the contrary, invests. Now, if our scale is increased by millions of times, we will get a large, but at the same time also a structured market picture.

There are many small speculators, and there are huge funds that cannot just take and place their application from hundreds of thousands of lots at once. Accordingly, price values appear where they are activated. There is even a separate type of analysis that studies the periods in the market when capital is placed by large market participants in order to follow them.

However, due to the fact that the forex market consists of separate cells, it is impossible to make a really complete picture. In our case, it is the reversal situations that are of interest, which indicate a sudden change in the conjuncture. That is, confident dynamic growth suddenly stops and consolidation begins, and then a reversal in general. Similarly, in a falling market.

Read more: What is Forex in simple words

The process of forming support and resistance levels

Now let's look directly at the very situation of the occurrence of such levels. Let's say we have an upward trend. At some point, it stops and the correction begins. The stop occurs for the reasons described above, that is, due to a shift in the aggregate interest of bidders towards sales.

After the end of the correction and the resumption of the trend movement, it is very often possible to observe how the price again begins to experience problems with overcoming this level. Despite the fact that many strategies involve entering a breakdown, you need to wait for this breakdown first, since a new decline is likely. It is on this principle that double or triple peaks are very often formed, and on very large periods and trends, a reversal is often accompanied by prolonged consolidation. That is, resistance can have an impact on the price more than once.

The same can be said about support. After the correction has started, it ends at some point, as the price becomes attractive for purchases. This is how support is formed. After the trend resumes, if a reversal suddenly occurs for some reason, this level will still be of interest to buyers and they will become active again when approaching it.

In general, the entire schedule is based on this principle. This does not mean that right every time the support and resistance levels will turn the market around, otherwise it would be in endless consolidation. But the fact that they are not easy to pass is an unambiguous fact, which can be easily verified by taking absolutely any scale chart of any trading instrument. And, as it is not difficult to guess, the larger our time frame, the greater the impact on the price will have such support and resistance levels. Now let's look at where support and resistance can form, as well as how the support and resistance line is drawn.

Where support and resistance levels are formed

There can be quite a lot of reasons. It is not necessary to consider every small local pullback as a new resistance or support. The market cannot move exclusively in a straight line, there are always fluctuations, but it is not easy to find out what causes them. It can be a news background, a sudden decision of some player with large capital, in a word, a lot of things. We will consider the most typical situations:

Reversal at the level in the past

Any clearly visible reversal in the market that occurred earlier in this price area will definitely have an impact in the future. Even if the trend direction is different, the trend scale is different and so on. Trends of different dimensions still have an impact on each other. You can verify this by looking at how the price develops an upward movement after a prolonged downward one. Each correction in the fall will prevent the price from passing through these areas quickly and easily.

Read more: How to trade on the Forex market

Technical levels

Here, without any details, we will simply list the most popular ones that we will study in the future:

  • Fibonacci levels;
  • Murray levels;
  • Indicator levels based on moving averages, the Ichimoku indicator, and so on.

At the end of long-term and large-scale trends

It is rare when a movement of 1000-2000 pips ends with a quick reversal. The presence of the price in the reversal areas usually indicates that someone is unloading their large position, or, on the contrary, there is a set of volume, that is, a very large order is gradually placed.

At the end of long-term and large-scale trends

So, for the level of support and resistance itself, we take the specific value of the extremum. This will be the starting point for us in analyzing the graph from this point of view. Next, let's look at why it works a little differently.

Read more: What are Fibonacci Retracement Levels and how to use them

Features of support and resistance levels

Sometimes a very interesting situation may arise - resistance, which for a long time prevented the price from passing, eventually turns into support, and vice versa. This phenomenon is due to the fact that such a range is very heavily traded, there is a fairly large accumulation of volumes.

A similar phenomenon is also often observed on small periods, for example, on a five-minute or fifteen-minute. The trend develops with stops and the formation of ranges, which are then overcome, but one of the boundaries becomes the same boundary for a new range. Thus, we can conclude that support and resistance levels play a much more important role than it might seem at first glance.

In trading, and it does not matter at what period it is conducted, it is very important to mark such levels in advance, draw indicative lines and not forget about them in the future. This will help to avoid situations when the market suddenly turns around and the trader simply does not understand why this happened. And all because I didn't mark these important support and resistance lines.

Support became Resistance

The second important feature is that the concept of "level" is very conditional. The fact is that applications are not placed on one specific value, but are "smeared" over the price area. If everyone had placed their pending orders on a specific value, then when it was reached, the price would simply plummet or rise. But this is not happening. On the contrary, you can see how the price does not reach the mark of resistance and support levels, or on the contrary, it goes beyond it. That is, it is not necessary to focus on the quotation. Such a value can be used as a kind of middle, from which we indent in both directions.

Read more: What is the difference between pips and ticks

Thus, we will have a zone, an area of values that are highly likely to lead at least to consolidation, or even to a reversal. The scale of such a zone should be determined depending on how the trend developed and on which time frame the analysis is conducted.

For example, if the growth or fall were dynamic, then we can expect a small jump over the designated level. If the traffic was sluggish and with numerous stops, then most likely it will not be reached. Depending on the time frame, we can offer the following tolerances in both directions, we will give the final size of the zone that is relevant around the value where the support and resistance line passes:

  • M5-M15 - 3-5 points
  • M30-H1 - 5-10 points
  • H4-D1 - 20-40 points
  • W1 - 50-100 points

There is also an unconditional dependence on the trading instrument itself. If we are talking, say, about a sedentary AUD/NZD cross, then these values may be excessive. But for pound pairs characterized by very high volatility, these values can be safely multiplied by 1.5 or even 2. You should also look at the behavior of the pair in this very range. If it is obvious that the movement is slowing down and a U-turn is planned, you can prepare for the entrance. If the pace does not fall, then a jump over the value where the support and resistance line is drawn is likely.

Read more: How to start trading forex from scratch

Where it meets

Often, the level of support and resistance is part of a pattern, for example, from graphical analysis. It can be a triangle in which one of the sides has no slope, that is, the forming lines converge, but one side is horizontal. An even more interesting example is the "flag" pattern, if it does not have a slope. In this case, the graph shows fluctuations within the framework of two horizontal lines drawn, that is, the overall shape becomes rectangular. In such a situation, the upper bound becomes resistance. And the lower one, on the contrary, is a support.

There is a similar story in the Head and Shoulders pattern. The head itself can be a simple jump over the level of resistance and support, where a reversal was formed, the second shoulder repeats the same scenario. And the neck line in this case is a line of support and resistance, and this time it will be a line, a level, and not a zone or area. This situation shows how fundamental a role supports and resistances play in trading in general, since they are often one of the "bricks" that together form more complex patterns, patterns.

Horizontal levels

It is also worth noting that the level of support and resistance is not necessarily strictly horizontal. It is in the classical sense and simple analysis that we give such examples. In the future, in the following articles, we will consider different variants and manifestations of the same principle - the impact on the price of events in the past and the effect of it.

Read more: Graphical analysis on forex, stock and cryptocurrency markets


 

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Is Forex a casino? One, but a global difference
Is Forex a casino? One, but a global difference You can often hear from people who have lost money on forex that this is a casino. Well, let's figure it out and look at the root of the issue.What does a trader do? He opens a position hoping to earn.What does a casino player do? He makes a bet in the hope of winning.What does an ordinary businessman do? He buys a barge of bananas and at the same time hopes that half will not rot on the way and, by selling the rest at a higher price, he will make a profit.What unites all 3 categories? Risks and risk management!We do not trade currency pairs and exchange instruments on the market! We trade forecasts and probabilities of the occurrence of an event.Now imagine a card player who sees the opponent's cards. How many times do you think his chances of hitting the jackpot increase? And add to this the opportunity to put as much money on the line as you are willing to lose painlessly. Or don't bet at all if you see that the opponent's cards are stronger. At the same time, you can withdraw your money and exit the game at any time. This is what distinguishes stock speculation from casinos. A professional market speculator has the opportunity to risk his money only when the probabilities and chances are in his favor!What happens next? Where does money come from and where does it go in forex? Yes, they are not going anywhere. They just flow from pocket to pocket. I mean the pockets of traders, not the pockets of unscrupulous brokers who initially set out to rob you (we have already discussed this in a separate article).It's all about emotions and banal laziness. Success in forex, as in any other business, comes only to those who are used to working hard and hard. To those who polish market skills and do difficult, and sometimes tedious work every day.What does a casino player do? He risks his money on contradictory odds, relying on luck and luck. And what does a professional trader do? He risks his money only when the chances and trading opportunities are in his favor, while not forgetting to manage his risks (this is probably the only thing we can manage 100% in forex).As a result, those who invest their time, energy and effort in mastering stock trading receive rewards from those who do not. These lazy people are the loudest and shout that forex resembles a casino.This is how our life works. And what about our life? Our life is a game!Read more: What is Forex and how does it operateGiven all of the above, what is the conclusion?For those who came to the market for fast money, forex is a casino. And for those who came seriously and for a long time – this is work as work.
Jul 22, 2022
IndexaCo
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Why investors choose to earn money on PAMM accounts
Why investors choose to earn money on PAMM accounts Earning on PAMM accounts is interesting, first of all, to those who have liquid capital. Money, as you know, should work. And make money. You can, of course, use the good old way and put your savings on deposit. But, alas, decent banks don't need money now ... It's ridiculous to say – a famous French brand with stars flying up on a green background now has 1.5% per annum on deposits in dollars. It's like putting it in a safe for storage… So the alternative in the form of PAMM accounts is very useful now.PAMM account (Percentage Allocation Management Module) – this is a kind of trust management. The name speaks for itself – you trust a Professional to manage your capital. With the development of banking and IT technologies, some convenient functions that were previously unavailable have become possible. For example, the manager now does not need to press 5 buttons and his sixth one if he has 5 accounts in management. All deposits are combined into one pool. Moreover, the size of investments from each investor can be completely different! Profit (as well as loss) is distributed proportionally to the contribution.PAMM technology appeared a long time ago. The investor can observe the actions of the manager in real time. Moreover, there is a function of instant disconnection of a separate account from the manager's management. Each client can individually set the maximum available drawdown level and stop loss size for his deposit. In addition, the bank guarantees that your funds will be available to the manager only for trading operations! Agree, this is important!In addition to the trading platform itself, the broker provides professional reporting for traders and clients. And also makes payments between project participants.Everything is worked out and reliable. But! There is a big "but", which I, as a professional and just as an honest person, cannot but say. Earning on PAMM accounts is an activity with a fairly high degree of risk. This is not a safe ... do not believe anyone who promises guaranteed profitability in this case. Or a profit of 100% per month. It's impossible!  Such "managers" have seriously lame money management and risk management.Read more: What is a PAMM accountWe have come to the point where we started – the capital should be liquid. In no case, do not take a loan, do not mortgage real estate and do not use the last money for such an investment.
Jul 22, 2022
IndexaCo
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Forex problems – what is the "Burnout Effect"
Forex problems – what is the \ From love to hate is one step.This is what our conversation will be about today.At the beginning of your trading career, you are burning with the market, you are interested in everything and you are ready to work 20 hours a day. You are full of optimistic hopes, expectations of freedom and financial independence. That's great!But at some point…You are no longer able to trade consistently and profitably. You understand that trading, the market and everything connected with it, are tired of you to hell! There comes a state in which you completely lose interest in forex, feel accumulated emotional and psychological fatigue and physical exhaustion. You don't want anything and nothing pleases you. You start hating yourself, the market and the whole world around you (as if he is to blame for something).Is this condition familiar?I "congratulate" you! You have a "burnout" effect, you have fallen into one of the psychological traps of trading and you have forex problems.If you think that you are alone in your worries, I can reassure you – the vast majority of traders have been through a similar state. Someone had the strength to overcome this trap in forex, and someone gave up trading forever…Personally, during the time of trading, which is almost 13 years, I wanted to quit forex 2 or 3 times and send everything to hell. And the number of guys with whom I have been in close contact and who have given up trading is in the dozens!But it's not that bad.  Let's dig into the depths and try to understand together WHY a trader's emotional burnout occurs, HOW to recognize its symptoms and WHAT to do.To treat the disease, you need to know the reasons that led to it, diagnose the first signs of a possible disease in time and prescribe the right treatment.Read more: Emotions in the market – how to get rid of them?Causes of "burnout"Monotony of trading. Trading is a difficult, boring, monotonous activity. Every single day you, as a robot, do the same thing. Market analysis – preparation of a trading plan – implementation of the transaction. No creativity for you, no flight of fancy for you, no diverse tasks for you. In a word – routine!Market uncertainty. It should be understood that you are not trading currency pairs, but the probability of the occurrence of a particular scenario (the price will go up or down). And no matter how well you do your homework and preparatory work, there is always a chance that your script will not work. And this in turn leads to the feeling that you are not in control of the situation, do not achieve the desired result and as a result – disappointment.Workaholism and isolation. Trading is an individual activity. Forex works 24 hours a day, 5 days a week. And if you follow the market all this time with a break of 2-3 hours for sleep, then you simply do not have time and energy for everything else. Your whole life is spent at the monitor screen, in fear of missing your best deal. As a result, you sacrifice other areas of your life for the sake of trading. Turning into a kind of reclusive recluse, who has only charts in front of his eyes.Pessimism in life. If a negative view of yourself and the world around you incinerates you from the inside and leads you into wild despair, you give yourself an internal installation at the start that you are a loser and you will not succeed. Thoughts materialize, and you get what you were thinking about – another failure.Health problems. Incorrect regime, problems with sleep and chronic lack of sleep, lack of physical activity (you spend the whole day in a chair) sooner or later lead to health problems. And when there is no health, nothing pleases, you don't want anything and you don't need anything.Symptoms of "burnout" at an early stageYou are haunted by the feeling that a new day will not bring anything good, that a new trade (even before the opening of the transaction) will be unsuccessful.It is morally difficult for you to trade. There is a feeling that you are wasting time and effort on a completely useless activity.You feel physically tired. You are deprived of vitality and energy.You are tired of everything you do. The idea that you have to trade again depresses and irritates you.You lock yourself in and stop communicating with your family and friends.You are trying to get at least some kind of buzz from life and begin to "jam", "drink" or "sniff out" problems.Read more: Trader's suicide. Psychology of trading or what to do if you lose on Forex?What to do with "burnout"?Difficult question! And there are no universal solutions. Emotional burnout in trading is dangerous because in the wake of disappointment in trading and forex problems, you can completely ruin your whole life. Therefore, it is necessary to solve this problem in a complex.I will try to outline banal tips that we all understand and know, but do not always follow.In relation to tradingFirst of all, we need to stop trading. Maybe for a week, maybe for a month, or maybe for six months. Then, when you cool down and relax, take a piece of paper in a calm atmosphere and formulate your goals, objectives and expectations:What are your trading goals for the month, for the week, for the day? Mathematics is a strong thing and helps in setting goals perfectly. For example, you want to earn 20% per month from your deposit on forex. Divide by 4 weeks, we get 5% per week. Divide by 5 working days, we get 1% per day.Ask yourself the question, how realistic and doable are the goals you have set? Will you be able to achieve them by following your own rules of money management and risk management?What changes do you need to make to your trading system in order to return to trading and trade without stress? For example, reduce the size of a position, stop or profit to a value that is comfortable for you. Review your market analysis, adjust the definition of entry and exit points and position tracking.Where can you find communication, support and feedback with other traders? As I have already said, you are not alone – 95% of traders have experienced the same problems in forex to one degree or another and have gone through the "burnout" effect.Applied to life in generalLife is multifaceted and interesting, you should not focus on one trade. Set yourself clear boundaries. Every day, set aside a certain time for trading, and then stop and turn off the computer. Set aside time for sports (when was the last time you were in the gym?), get a hobby, chat with family and friends, and just walk in the fresh air. Occupy your brain with thoughts about something good and pleasant, besides trading.Read more: Why do 90% of traders lose on Forex and binary options?And I am 100% sure, then you will not burn in the market and you will not need firefighters!
Jul 20, 2022
IndexaCo
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