Support and Resistance Indicators with a Trading Strategy
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Support & Resistance zones are very important tools in Forex & CFD trading. There are many appliances of support & resistance trading, not just in Forex, but also other financial markets. In this article you will discover what are support & resistance (S&R) levels, the psychological element of S&R levels, Fibonacci, Wolfe Waves, and much more!
Defining Support and Resistance
Support and resistance levels are integral to any financial market. Market participants define these levels, which essentially represent supply and demand, or the order flow, which can rapidly shift. It is here that the bulls and bears oppose, with a winning side always prevailing, one way or the other. The price can be submissive or reactive to a price level, where buyers or sellers match each other.
There are hundreds of methods for locating support and resistance (S&R). If a trader decides to place all of the lines on the chart, they would not even be able to see the price on the chart. Why? Because the price would simply vanish behind the lines. Obviously, traders must choose the best S&R levels, otherwise, the chart becomes unreadable and unusable.
So, how can traders distinguish the most important levels? And, first of all, what should you consider as being important? S&R only becomes valuable when the market actually respects the levels in the majority of the cases. If an S&R level is only used occasionally or rarely, there is no benefit for a trader to place it on the graph.
To summarise: Traders are looking for the very best and most respected S&R levels.
Each day, traders start their trading journey in the world's largest financial market, Forex. Novice traders aim to benefit from the enormous volatility taking place in the $5.3 trillion average daily trading volume movements. The traders, being new to the market, aren't expected to make bold steps, and those who do take such steps should trade with thorough analysis of the Forex market. The market has its rhythm; it is better to identify the underlying movement of the pair, and then trade, rather than trade based on gut feeling.
One of the key types of analysis is technical analysis. This school of technical study has an underlying assumption that "history repeats itself", and is based on the historical movement of the underlying currency pairs/stocks/commodities, etc. At the end of thorough technical analysis, a trader infers important supports and resistances which should be considered while deciding on a trade opportunity. A good example of one such basic tool of technical analysis is – "Fibonacci" – which will be explored in this article, together with various other ways to determine significant S&R levels, which can be useful for a novice trader.
Psychological Levels of Support and Resistance
Often, the price will test certain psychological levels, and when the price ends with multiple 0's, these are often called "psych" levels. Humans tend to gravitate toward round numbers when discussing price levels, particularly in Forex. To illustrate, when traders discuss the future value of the Euro, they are unlikely to give an answer like 1.18732 or 1.20345. Rather, they are more likely to round off their orders or price forecast to something simpler, like 1.1800 or 1.2000. Often, we will see a cluster of orders around these big round numbers, creating stronger levels of S&R.
In addition, the more common psych levels usually appear when the price has two zeros at the end, such as 1.1800 or 112.00. However, even more powerful psych levels would end with three zeros, such as 1.2000 or 110.00. Additionally, the most powerful psych levels of all, end with four zeros, for instance, 1.0000 or 100.00. The chart below depicts four levels drawn at various psychological levels. We can clearly see their effect on price action.
Fibonacci Support and Resistance
You might be wondering how to find Fibonacci support and resistance in day trading. It should be a straightforward process. Fibonacci numbers, the great work of the 13th-century Italian mathematician – Leonardo Fibonacci – have been one of the main secrets in creating many technical indicators that have helped to conduct the precise technical analysis.
What is Fibonacci?
Fibonacci is a series of numbers that results in a particular number, by adding the previous two numbers, for example, 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. These numbers are widely used to calculate targets and entry points while trading stocks, commodities, and, especially, in Forex during trends that occur in the market. Remember, Fibonacci is used only in trending markets, and should always draw from left to right.
Fibonacci retracement numbers are used to indicate targets and entry points during trending markets. They signal the reversal points where traders might find entries during retracements in a trend. In a downtrend, you plot Fibonacci levels from top to bottom (always left to right).
- Point A is the swing high
- Point B is the swing low
- Point C is where the retracement has potentially ended, and new trend movement may start (entry point)
Source: USD/JPY H1 chart - Admiral Markets MT4 - Data Range: 13 Nov, 2017 - 30 Nov, 2017
In an uptrend you plot Fibonacci levels from bottom to top (always left to right).
Source: GBP/JPY H4 chart - Admiral Markets MT4 - Data Range: 7 Aug, 2017 - 3 Nov, 2017
- Point A is the swing low
- Point B is the swing high
- Point C is where the retracement has potentially ended, and a new trend movement may start (entry point)
Fibonacci Expansion/Projection provides potential levels for taking the profit once the starting point of the current movement has already been tested, and the price continues trading in the same direction. Let's take a look at an uptrend target example with the GBP/JPY shown above: (Fibonacci expansion is plotted in red)
- Point 1 is the starting point
- Point 2 is the highest point
- Point 3 is the end of retracement (also aligned with Fibonacci retracement)
Source: GBP/JPY H4 chart - Admiral Markets MT4 - Data Range: 7 Jul, 2017 - 27 Nov, 2017
The main targets with Fibonacci Expansion are:
- 0.618 - FE 61.8
- 1 - FE 100.0
- 1.618 - FE 161.8
Wolfe Waves are a naturally occurring trading pattern present in all financial markets. Originally discovered by an S&P500 trader named Bill Wolfe, Wolfe Waves work a bit like Elliot Waves, albeit there are some differences in charting techniques. Patterns identified as Wolfe Waves are natural and reliable reversal patterns, present in all markets and timeframes.
A Five-Wave Pattern
As the name suggests, this pattern is composed of five waves showing supply and demand towards an equilibrium price. Wolfe Waves usually develop on all time-frames, and are used to predict where the price is heading to, and when it might arrive there. If identified correctly, Wolfe Waves can be used to accurately predict the scope (equilibrium price) of the underlying security, and to anticipate price reversals which are likely to cause big price movements.
The most important thing is to identify the prevailing trendline, and ensuring that it has at least four touch points. The next important factor is to locate a clear break of this trendline. Keeping in mind that reversals in the market only occur 20% of the time, the last high/low should be challenged. The Wolfe Secret is to use this point for your trigger on the price pattern. The idea is that the prevailing trendline becomes a diagonal support/resistance line that you use to identify this entry point.
Identification of the Wolfe Wave
The Wolfe Wave consists of a 1-2-3-4-5 wave formation, with 2 and 4 referring to the retracement waves seen in the Wolfe Wave formation. Wolfe Wave traders distinguish between two different types of Wolfe Waves – strict waves and modified waves.
Strict Wolfe Waves are charted by using these rules:
- Waves 3-4 must remain within the channel created by 1-2
- Wave 1-2 equals waves 3-4
- Wave 4 is between waves 1 and 2
- There is regular time between all waves
- Wave 5 exceeds the trendline created by waves 1 and 3
Source: GBP/JPY H1 chart - Admiral Markets MT4 - Data Range: 20 Oct, 2016 - 2 Nov, 2016
The main difference between strict and modified waves is that in a modified Wolfe Wave, point 4 is found within the channel created by waves 1-2.
Source: GBP/JPY H1 chart - Admiral Markets MT4 - Data Range: 12 Sep, 2016 - 16 Sep, 2016
Source: GBP/JPY H1 chart - Admiral Markets MT4 - Data Range: 31 Oct, 2016 - 7 Nov, 2016
Trigger: After the perceived Wolfe Wave pattern has been identified, place the limit order trigger entry near the diagonal line resistance area of the price pattern. Usually, the trade is taken when the price closes above the trendline created by waves 1 and 3.
Stop: The last high/low of the pattern.
Profit Target: Point 5 is the trade entry point, and is expected to hit the EPA (the take-profit point) by meeting a line drawn from point ,1 which also intersects with point 4. In the example below, we can clearly see that the EPA (expected price at arrival) has been met and overshot:
Source: GBP/JPY H1 chart - Admiral Markets MT4 - Data Range: 1 Nov, 2016 - 4 Nov, 2016
The most basic and simplistic definition of the Camarilla is that it defines trend and range. Traders can simply and quickly define whether a market is trending down, up, or if it is ranging by looking at the Camarilla indicator for a few seconds. Simply put, the Camarilla indicator provides valuable, simple, and automated S&R levels.
The Camarilla is extremely well-respected by professional traders. One of the main reasons for this is that institutional traders use it very intensively. The other reason is that the market naturally gravitates around the Camarilla levels, and uses them as the centre or boundary for daily and weekly price action.
The other advantages of Camarilla include:
- That it is generated automatically every trading day
- That it requires no adjustment or manual work by the trader
- That it keeps the chart simple with six basic lines (3 red; 3 green)
Trend: The price is in a trending mode when the it is outside of the H3 and L3 zones. That means either above the H3 for an uptrend or below the L3 for a downtrend.
Range: The price is in a range mode when it is in between the H3 and L3 zones.
Basic Camarilla Support & Resistance Scalping
Camarilla can be traded in the form of:
- S&R basics
- S&R breakout.
Scenario 1: The Market opens between the H3 and L3 levels
If the market opens between the H3 and L3 levels, you must wait for the price to approach either of these two levels. Potential trades can be made when the price hits the H3 or L3.
Bounce trade: If we want a short trade, we will aim for the price to reject at the H3 level before entering the trade. Stops are placed above H4 for short trades.
Breakout trade: If we want a short breakout trade, we need to aim for the price to move below the L3 level before entering the trade. Stops are placed above H3 or H4 for short trades.
Source: EUR/CAD M30 chart - Admiral Markets MT4 - Data Range: 28 Nov, 2017 - 30 Nov, 2017
Bounce trade: If we want a long trade, we will aim for the price to bounce at the L3 level before entering the trade. Stops are placed below L4 for long trades.
Breakout trade: If we want a long breakout trade, we need to aim for the price to move above the H3 level before entering the trade. Stops are placed below L3 or L4 for long trades.
Source: GBP/JPY M30 chart - Admiral Markets MT4 - Data Range: 28 Nov, 2017 - 30 Nov, 2017
Scenario 2: The Market Opens Outside the H3 and L3 Levels
If the market opens outside H3 and L3, we should wait for the market to retreat back through the L3 or H3 level – as we will then trade with the trend, and once again, place a stop-loss somewhere before the matching H4 or L4 level. This usually happens if the market opens with a gap. This can be a slightly dangerous scenario if the gap is about to close. However, some traders use it in the form of S&R scalping, aiming for 10-15 pips only.
The open price is between H3 and H4 (long trades only):
- Buy when the price moves above H4
- Stop loss is just below H3
- Target is the H5
Source: GBP/AUD M30 chart - Admiral Markets MT4 - Data Range: 1 Sep, 2017 - 5 Sep, 2017
The open price is between L3 and L4 (short trades only):
- Sell when the price goes below L4
- Stop-loss is just L3
- The target is the L5
Source: USD/CHF H1 chart - Admiral Markets MT4 - Data Range: 20 Apr, 2017 - 26 Apr, 2017
Murrey Math Lines (MML)
Source: USD/CHF H1 chart - Admiral Markets MT4 - Data Range: Nov 2017 - Murrey Math indicator
According to Gann Theory, prices usually move in the form of octaves. In Murrey Math lines, this is represented by 1/8's. These 1/8's are points of price support and resistance. If we provide these octaves with different characteristics of price action, each Murrey math line has its own property.
8/8 and 0/8 Lines (Ultimate S&R)
These lines are supposed to be the hardest to penetrate on the way up and give the most significant support on the way down. (Prices will likely reject these lines on the first test and will hardly penetrate above).
7/8 Line (Weak, Stall, and Reverse)
This line is a weaker resistance. If prices run up too fast, and if it stops at this line, they might reverse down quickly. If the price does not stop at this line, it should move up to the 8/8 line.
6/8 and 2/8 Lines (Reversal Pivots)
These two Murrey lines are second only to the 4/8 line in their ability to force prices to reverse in the opposite direction.
5/8 Line (The Top of Trading Range)
The prices usually spend 40% of the time moving between the 5/8 and 3/8 lines. If prices move above the 5/8 line, and stay above for some time, the market is said to be selling at a premium spot compared to what one wants to pay for it. Prices might remain above this line in the "premium area". If, however, the price drops below the 5/8 line, there is a chance it will drop further, searching for support at a lower level.
4/8 Line (Major Support/Resistance)
This line provides the highest amount of support and resistance. This line acts as a solid support when prices are above it, and as the dominant resistance when prices are below it. This price level is one of the best levels to place a new sell and buy.
3/8 Line (The Bottom of Trading Range)
If the price is below this line and moving upwards, this level acts as a resistance and should be difficult to penetrate. If the price goes above this line and remains above it for some time, we might say that there is a tendency that the price will remain above this line, and may spend approximately 40%* of the time moving between this line and the 5/8 line.
1/8 Line (Weak Level, Stop and Reverse)
This line has a weak level of support. If the price drops towards these levels too fast, and if it stalls at this line, then it might reverse up quickly. But if the price does not stop at this level, it might move down to the 0/8 line. There are standard Murrey Math Lines (MML) principles, and traders use them to define clear S&R levels for their trading strategies. Some MML S&R indicators use +1/8, +2/8, and -1/8, as well as -2/8 octaves. When these octaves are broken, the MML S&R indicator will print a new octave.
Admiral Market Pivot
If you are using Admiral Markets' trading software for technical analysis, the S&R levels are presented uniquely and exclusively via the Admiral Markets Pivot indicator, which is available through the MetaTrader Supreme Edition (MTSE) plugin. Admiral Pivot is a professionally coded indicator for trading financial markets.
It is used for:
- S&R scalping
- S&R breakouts
- S&R Zones
- S&R basic indicators
Its uniqueness comes from a modifier that you can locate within the indicator properties.
Source: Admiral Pivot Indicator, MT4 SE Add-on
The custom indicator (shown above) allows you to select any of the nine different time -frames that you can watch on the current time frame. For example, you can trade on a 5-minute chart with H1 pivot points attached to the chart. Additionally, you can customise the indicator to your liking using additional options in the indicator properties.
Support and Resistance Trading Strategy with Admiral Pivot
Here is an example of a trading strategy based on S&R levels defined by Admiral Pivot:
- Admiral Pivot (D1)
- ADX (Average Directional Index) - (14) with 20 level added
- 5 EMA (Exponential Moving Average) - (close) – Green
- 15 EMA (close) – Blue
- 30 EMA (close) – Red
- Stochastic (5,3,3) with 50 level added
Source: GBP/USD M15 chart - Admiral Markets MT4 - Data Range: 30 Nov, 2017 - 1 Dec, 2017
- The price needs to cross above the Admiral Pivot Point support (PP, S1, S2, or S3)
- ADX (14) is higher than 20
- 5 EMA is above 15 EMA, while both are above 30 EMA (Green > Blue > Red);
- The stochastic is higher than 50
- Re-entry can be made when the stochastic crosses up to the 50 level from below, if the price is in uptrend
- The target is the next Pivot Point or 3-5 pips away from it
- The stop-loss is 5 pips below the last swing low
Source: EUR/USD M15 chart - Admiral Markets MT4 - Data Range: 29 Nov, 2017 - 1 Dec, 2017
- The price needs to cross below the Admiral Pivot Point resistance (PP, R1, R2 or R3)
- ADX (14) is higher than 20
- 5 EMA is below 15 EMA, while both are below 30 EMA (Red > Blue > Green)
- The stochastic is lower than 50
- Re-entry can be made when the stochastic crosses down to the 50 level from above if the price is in downtrend
- The target is the next Pivot Point or 3-5 pips away from it
- Stop-loss is 5 pips above the last swing high
Source: GBP/USD M15 Chart - Admiral Markets MT4 - Data Range: 30 Nov, 2017 - 1 Dec, 2017
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.