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Support and Resistance Indicators with a Trading Strategy

Support and Resistance

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 markets.

Defining Support and Resistance

Support and resistance are integral to any financial market. Market participants define these levels, which are essentially supply and demand, or the order flow, which can rapidly shift. It is here that the bulls and bears oppose, with a winning side prevailing. The price can be submissive or reactive to a price level, where buyers or sellers match each other.

There are hundreds of methods to locate 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 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, then there is no benefit for a trader to place it on the graph. Simple right?

To summarise: Traders are looking for the VERY best and most respected S&R.

Each day, plenty of 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 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 types of analysis is technical analysis that the traders' fraternity admires a lot for deciding their trades. 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. In the current article, one such basic tool of technical analysis – " Fibonacci" – is being discussed together with various other ways to determine significant S&R levels which can become helpful for the novice trader.

Psychological Levels of Support and Resistance

Often, the price will test certain psychological levels when the price ends with multiple 0's, and these are often called "psych" levels. Humans tend to gravitate around round numbers discussing price levels, particularly, 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 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. Further to that, the most powerful psych levels of all, end with four zeros, like 1.0000 or 100.00. The chart below has four levels drawn at psychological levels. We can clearly see their effect on price action.

Risk free Forex demo account

Fibonacci Support and Resistance

You might be wondering how to find Fibonacci support and resistance in day trading. It should be a bit straightforward process.

Fibonacci numbers, the great work of the 13th-century Italian mathematician – Leonardo Fibonacci – have been one of the main secrets to creating many technical indicators that helped to conduct the precise technical analysis.

Fibonacci is a series of numbers that results in a 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, Forex during TRENDING markets.

The following paragraph briefly describes the use of Fibonacci in the Forex market which is helpful for beginners. Remember that 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 downtrend, you plot Fibonacci levels from top to bottom (always left to right).

  1. Point A is the swing high;
  2. Point B is the swing low;
  3. Point C is where the retracement has potentially ended, and new trend movement may start (entry point).

USD/JPY H1 chart, Admiral Markets MT4, Nov 2017

Source: USD/JPY H1 chart, Admiral Markets MT4, Nov 2017

In uptrend, you plot Fibonacci levels from bottom to top (always left to right).

GBP/JPY H4 chart, Admiral Markets MT4, Aug- Nov 2017

Source: GBP/JPY H4 chart, Admiral Markets MT4, Aug- Nov 2017

  1. Point A is the swing low;
  2. Point B is the swing high;
  3. Point C is where the retracement has potentially ended, and new trend movement may start (entry point).

Fibonacci Expansion/Projection gives 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 see an uptrend target example with the GBP/JPY shown above. (Fibonacci expansion is plotted in red)

  1. Point 1 is the starting point;
  2. Point 2 is the highest point;
  3. Point 3 is the end of retracement (also aligned with Fibonacci retracement).

GBP/JPY H4 chart, Admiral Markets MT4, Jul-Nov 2017

Source: GBP/JPY H4 chart, Admiral Markets MT4, Jul-Nov 2017



See the gif below on how to draw a proper Fibonacci Expansion

how to draw a proper Fibonacci Expansion GBP/USD H1 chart, Admiral Markets MT4, Jun-Jul 2017

Source: GBP/USD H1 chart, Admiral Markets MT4, Jun-Jul 2017

The main targets with Fibonacci Expansion are:

  • 0.618 - FE 61.8
  • 1 - FE 100.0
  • 1.618 - FE 161.8

Wolfe Waves

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 get 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 thing is to see a clear break of this trendline. Remembering that reversals in the market only happen 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 being the retracement waves seen in the Wolfe Wave formation. The Wolfe Wave traders distinguish two different types of Wolfe Waves – strict waves and modified waves.

Strict Wolfe Waves are charted by using these rules:

  1. waves 3-4 must stay within the channel created by 1-2;
  2. wave 1-2 equals waves 3-4;
  3. wave 4 is between waves 1 and 2;
  4. there is regular time between all waves;
  5. wave 5 exceeds the trendline created by waves 1 and 3.

strict wave.jpg

Source: GBP/JPY H1 chart, Admiral Markets MT4, Oct-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.

wolfebearish.jpg

Source: GBP/JPY H1 chart, Admiral Markets MT4, Sep 2016

wolfebullish.jpg

Source: GBP/JPY H1 chart, Admiral Markets MT4,Oct-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 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 point 4.

In the example below, we can clearly see that the EPA (expected price at arrival) has been met and overshot.

GBP/JPY H1 chart, Admiral Markets MT4, Nov 2016

Source: GBP/JPY H1 chart, Admiral Markets MT4, Nov 2016

Camarilla Pivots

The Camarilla is extremely well-respected by the market as you can see from the analyses and webinars of our professional analyst and trader – Nenad Kerkez T.

One of the main reasons 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 and boundaries of daily and weekly price action.

The other advantages are that the Camarilla:

  1. is generated automatically each trading day;
  2. requires no adjustment or manual work by the trader;
  3. keeps the chart simple with six basic lines (3 red; 3 green).

Simply put, the Camarilla indicator provides valuable, simple, and automated S&R levels.

The most basic and simplistic definition of the Camarilla is that it defines trend and range.

TREND: The price is in a trending mode when the price 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 price in between the H3 and L3 zones.

Traders can simply and quickly define whether the market is trending down or up or whether it is ranging by looking at Camarilla indicator for a few seconds.

Basic Camarilla Support & Resistance Scalping

Camarilla can be traded in a form of:

  1. S&R basics
  2. 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 taken when price hits the H3 or L3.

SHORTS:

Bounce trade: If we want a short trade, we will look 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 look for the price to move below the L3 level before entering the trade. Stops are placed above H3 or H4 for short trades.

EUR/CAD M30 chart, Admiral Markets MT4, Nov 2017

Source: EUR/CAD M30 chart, Admiral Markets MT4, Nov 2017

LONGS:

Bounce trade: If we want a long trade, we will look 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 look for the price to move above the H3 level before entering the trade. Stops are placed below L3 or L4 for long trades.

GBP/JPY M30 chart, Admiral Markets MT4, Nov 2017

Source: GBP/JPY M30 chart, Admiral Markets MT4, 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 then trade WITH the trend, and once again, put 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 bit dangerous scenario if the gap is about to close. However, some traders use it in a 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.

GBP/AUD M30 chart, Admiral Markets MT4, Sep 2017

Source: GBP/AUD M30 chart, Admiral Markets MT4, 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.

USD/CHF H1 chart, Admiral Markets MT4, Apr 2017

Source: USD/CHF H1 chart, Admiral Markets MT4, Apr 2017

Murrey Math Lines (MML)

USD/CHF, H1 chart, Admiral Markets MT4, Nov 2017, ecs. Murrey Math indicator

Source: USD/CHF, H1 chart, Admiral Markets MT4, Nov 2017, ecs. 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 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 to what one wants to pay for it. Prices might stay 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 looking 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 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 stays above it for some time, we might say that there is a tendency that the price will remain above this line and 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, -2/8 octaves, too. When these octaves are broken, the MML S&R indicator will print new octave.

Admiral Market Pivot

In technical analysis, the S&R levels are presented uniquely and exclusively via Admiral Markets Pivot indicator ( MetaTrader Supreme Edition).

Admiral Pivot is a professionally coded indicator for trading financial markets. We use it for:

  • S&R scalping;
  • S&R breakout;
  • S&R Zone;
  • S&R basic indicator.

Its uniqueness comes from a modifier that you can find in the indicator properties.

Admiral Pivot Indicator, MT4 SE Add-on

Source: Admiral Pivot Indicator, MT4 SE Add-on

It 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 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.

Download MT4 Supreme Edition - Forex trading platform

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.

TImeframe: M15

Pairs: EUR/USD, GBP/USD, USD/JPY, AUD/USD, NZD/USD, USD/CHF, EUR/JPY

Indicators:

  • Admiral Pivot (D1)
  • ADX (14) with 20 level added
  • 5 EMA (close) – Green
  • 15 EMA (close) – Blue
  • 30 EMA (close) – Red
  • Stochastic (5,3,3) with 50 level added

GBP/USD, M15 chart, Admiral Markets MT4, Nov-Dec 2017

Source: GBP/USD, M15 chart, Admiral Markets MT4, Nov-Dec 2017

Long Trade

  • 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 50 level from below if the price is in uptrend;
  • The target is next Pivot Point or 3-5 pips away from it;
  • Stop-loss is 5 pips below the last swing low.

EUR/USD, M15 chart, Admiral Markets MT4, Nov-Dec 2017

Source: EUR/USD, M15 chart, Admiral Markets MT4, Nov-Dec 2017



Short Trade

  • 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 50 level from above if the price is in downtrend;
  • The target is next Pivot Point or 3-5 pips away from it;
  • Stop-loss is 5 pips above the last swing high.

GBP/USD, M15 Chart, Admiral Markets MT4, Nov-Dec 2017

Source: GBP/USD, M15 Chart, Admiral Markets MT4, Nov-Dec 2017


If you have any questions, feel free to ask us in the comments section below.