Few Words About Price Levels
Commonly the majority of buys and sells come precisely on support and resistance levels. This causes high volatility and abrupt changes in the price direction in these areas. These levels form some kind of barrier. If the pair manages to break through them, traders will take appropriate action.
Resistance levels must be broken to the upside. Once the pair rises to this level bears often start selling and the market goes down.
The same thing happens with the support level. Once the price slips down to the key support that you need to break to the downside, the bulls might start buying and the chart will go up again.
A clear break and consolidation above the key resistance or below the key support usually tell us that the trend might change.
Types of Price Levels
On Forex, there are 4 main types of price levels:
- Round numbers levels or psychological levels
- Dynamic levels
You already know the main horizontal levels: resistance and support. Support levels are marked on the highest highs of the current chart. Resistance levels are at the lowest lows. Since the line extends to the right, in the future you can see areas where the price can change its direction.
There is another type of horizontal levels. If the price moves sideways then you can mark a sideways channel. The top and bottom boundaries will form horizontal price levels.
Non-horizontal levels include trend lines, which are the boundaries of the upward or downward channel of price movement.
Like resistance and support levels, trend lines are set on the highest highs and lowest lows on the chart. The points at which the price touches the lower or upper edge of the channel are the kind of support and resistance levels.
Round Numbers or Psychological Levels
Traders often choose to set positions next to round numbers, such as 100, 150, 200, 225, 250, etc. That is why volatility at these levels often increases. Based on this psychological aspect, some traders mark round numbers. This way they are prepared for a possible change in price.
This type of price level is usually built into your platform. Once you turn it on, it will appear on your chart and automatically change with each price movement. An example of this type of price level is a moving average. It shows where the price was on the same chart a certain time ago. For example, 200-day Moving Average H1 shows where the price was on a 1-hour chart 200 days ago.
How to Set Price Levels
Since FXCL offers its traders the MetaTrader 4 platform, I will tell you how to set the necessary levels in this terminal. It’s quite simple:
- Choose a currency pair and open a chart
- Pick 4-hour or daily timeframe
- Find the highest highs and lowest lows on the chart. Using the required options in the chart menu, draw horizontal lines for key resistance and support levels or bias lines for trend channel.
- If you trade on charts with a shorter timeframe, then after determining the key levels, zoom in the chart and repeat the steps from the previous paragraph.
How to Trade at Price Levels?
Perhaps trading on support and resistance levels is the simplest strategy and is optimal for beginners.
- Buy by the support level if the trend or channel goes to the upside
- Sell by the resistance level if the trend or channel goes to the downside
Of course, it’s impossible to know for sure whether the market will hold the influx of bears or bulls in the area of price levels. Therefore, sometimes it is better to wait for confirmation that the chart will bounce off the line. Wait until the price consolidates above support or below resistance level before setting a trade.
A Bit About False Breakouts
It’s important to understand that support and resistance are areas rather than levels. Sometimes the price does not bounce off the line instantly, but goes a few points beyond it and only then changes direction. Such market behavior is called a false breakout.
Some traders use false breakouts as their trading strategy. They wait until the price goes beyond the price level and open a trade as soon as the market changes its direction. If you plan to use false breakouts in trading, set Stop Loss a few points below or above trading levels.
Trading on false breakouts is a great opportunity, but since they are not common, you should not use them as your only strategy, or you will miss many other perfect setups in the market.
Couple More Tips
If you want to increase the chance for a positive outcome of your trade and enlarge your potential profit, follow these tips:
- Trade on daily or 4-hour charts. Resistance and support levels on charts with a smaller timeframe often give false signals. The price behaves more predictably on charts with a higher timeframe because price levels on them are more reliable. So, the chance of winning is much higher.
- Use pullbacks. If you missed the moment of a clear break of the resistance or support level, wait until the price will retest them. This works, because sometimes at the moment of a breakthrough the level changes its purpose. A broken resistance becomes the current support and broken support turns into resistance.
- Set Stop Losses. The market is unpredictable, therefore always set Stop Loss a few points below support or above resistance levels.
- Set Take Profits. If you don’t have the ability to constantly track your trades, take care of your positions in advance. Install Take Profit a few points below the resistance level if you are buying in the support area. And Vice Versa, set Take Profit right before the support level if you are selling in the resistance area.
- Use the moving average as resistance or support. Many traders use a 50, 100 and 200-day indicator in trading. That is why the moment the moving average is crossed the market volatility might increase. Track these levels on your chart and use this line as dynamic resistance or support levels.
At first glance, trading at resistance and support levels seems extremely simple. But do not fool yourself. Consistent income on Forex always requires practice. Start with a demo account. Move to a real account only after a couple of months of successful practice.