Two pairs of support and resistance levels based on the candlesticks of the timeframe specified in the input parameters.
The formula for the calculation of the levels:
Res2 = ( Low + High + Close ) / 3 + ( High - Low ) * 0.618Res1 = ( Low + High + Close ) / 3 + ( High - Low ) * 0.5Sup1 = ( Low + High + Close ) / 3 - ( High - Low ) * 0.5Sup2 = ( Low + High + Close ) / 3 - ( High - Low ) * 0.618
The RES-SUP indicator
Author: Nikolay Kositsin
Three Ways to Trade Support and Resistance (based on dailyfx article)
One of the more difficult concepts within Technical
Analysis is grasping the premise of support and resistance. There are
numerous ways to identify these levels, and even after identified, there
are a plethora of ways of integrating and trading with them.
In this article, we’re going to show you three ways that traders can properly integrate these levels.
Risk Management/Stop Placement
While this may be the least ‘exciting’ of the three
ways to integrate support and resistance, this is also probably the most
Stop-loss orders help traders prevent blowing up
their entire accounts on just one or two bad trade ideas. We’ve looked
at the importance of stops, and further, risk management in numerous of
our previous articles.
Support and resistance can help traders to define their risk amounts for any individual position.
Let’s say that a trader wants to buy in a range, and
if that range doesn’t continue, they want to close out the position
quickly in an effort to mitigate the loss.
In this case, it makes sense to place the stop for
the long position below support so that once support becomes violated,
the stop-loss can close the position and the trader can look to avoid
taking a larger loss.
Support and resistance can help with stop placement:
This can also work for reversal plays.
If a trader is looking to buy a bullish reversal, they can look to the
low that was established before the reversal began; and they can place
their stop there. This way, if the reversal doesn’t pan out, and if
prices do continue moving in the previous trend-side direction, the
position can be closed as traders look to mitigate their loss.
The exact opposite would be the case for short
positions, with traders looking to place stops above resistance so that
should the market continue rising; the short position can be closed with
a minimum of a loss.
Determining a Market’s Condition
We’ve all heard it since we were young: Buy low, and sell high.
If only matters were that simple.
What constitutes ‘high’ and what constitutes ‘low?’
After all, these are very relative matters, and low in a market today
might be sky-high a week from now.
This is where support and resistance come into play, and this is why finding strong, confluent levels can be so beneficial.
Think about why support or resistance may come into a
market: The only real reason is due to an influx of buyers or sellers
at a particular price level.
Let’s say that we’re expecting support at a price of 1.6750 on GBPUSD; which is a psychological level
in the currency pair. As prices move lower towards this expected
support level, buyers begin coming into the market in anticipation of a
future support level being so close. As prices move closer and closer to
this level of support, more and more buyers notice this ‘perceived
value’ in GBPUSD and they also look to enter in long cable positions.
The exact low of the move is considered a ‘price action swing.’
Eventually, the number of buyers in GBPUSD outstrips
the number of sellers, and this is what creates a reversal in the
market as the higher level of demand takes over smaller level of supply.
This is how price action works, and it happens in short and long-terms alike.
Price action will also help traders see support and resistance in trending markets and ranging markets as well.
In trending markets, prices will generally make
‘higher-highs’ and ‘higher-lows,’ or ‘lower-lows’ and ‘lower-highs,’
while ranging markets will generally display more stable levels of
support and resistance. The example below in USDJPY shows both of these types of environments on the same chart.
Current price relationship with Support/Resistance can define the market’s condition:
After the market condition has been identified, traders can then move on to the next step of placing the trade.
After traders have been able to allocate risk and
grade market conditions using price action with support and resistance,
they can move on to the next logical step in looking to place trades and
Remember that future prices are unpredictable.
Implementing support or resistance simply gives us the possibility that
support or resistance may
hold; and if it does in-fact hold, then traders can look for rewards or
profits that are significantly larger than the amount they had to risk.
If a trader is looking to buy an up-trend, they want
to look to do so cheaply. So they can simply wait for prices to retrace
a portion of the up-trend until a support level comes in to the market.
This support level can be a psychological level, or a Fibonacci retracement, or a pivot point; better yet, this support level can offer confluence from multiple types of support/resistance analysis.
After price action has exhibited that the
retracement may be over, the trader can look to enter long with a stop
below the support level. This way, if the up-trend doesn’t continue
coming back in the market, the loss can be mitigated. But if the trend
does come in, then the trader can look to profit two, three, or four
times the amount they had to initially risk entering the position.
The image below, taken from the article, shows how traders can look to buy after this ‘higher-low’ was made in the up-trend.
Price action can be used to enter positions in trending markets:
But what if the market isn’t displaying a bias?
In the image below, we illustrate how traders can
use price action along with support and resistance to build a
range-strategy in a market devoid of any significant trends.
Price action can also be used to enter trades in ranging markets: