The support and resistance levels can help traders to try and identify the direction of the market by pointing price data.
What are Support and Resistance indicators?
The support and resistance level indicators are those tools that prevent the price from going in a particular direction.
Support levels occur when there is a high demand for a certain asset. When the price starts to decline, it forms a support line. The resistance level appears when there is an increase in the supply of a specific asset. When the price rises, it creates a resistance line.
The support and resistance indicators help traders in measuring these levels. From this, traders can tell whether the price of an asset is rising or falling.
The highs and lows formed by the support and resistance levels can trigger buy or sell signals. Traders need to remember that often breakouts can surface on these levels, so they have to adjust their positions as a trend reversal and not as a continuation.
Types of Support and Resistance Indicators
1. Fibonacci Retracement
Fibonacci retracement is a horizontal line indicator that tells about support and resistance levels. The indicator is based on Fibonacci numbers. Fib numbers contain a sequence of numbers that forms by adding the previous two numbers like 0, 1, 1, 2, 3, 5, 8, 13, 21, and so on.
In the Fibonacci retracement indicator, the calculations happen as a ratio. The most common ratios are 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
Traders can plot the indicator between any two points, such as high and low. The Fibonacci retracement would create support and resistance levels between these two points.
The advantage of using Fibonacci retracement is that it can find exact entry and exit points, with stop-losses closer to the recent swing low or high.
2. Wolf Wave
The Wolfe Wave indicator is based on five waves that represent the price in an equal pattern. By forming these five waves, the indicator draws support and resistance lines.
The indicator shows support levels when there is a high demand for a particular asset and when the price starts to decline, it presents support level in the form of waves. On the other hand, the resistance line forms when there is an increase in supply, and the price starts to rise.
To trade the indicator, traders look for the breakouts. As the Wolf makes waves, the price attempts to move outside support and resistance levels. The trader then takes their positons after breakouts. In an uptrend, when the breakout occurs, it’s a sign of reversal, and traders may take short positions. Whereas, when the breakout appears in a downtrend, traders may take buy positions.
3. Camarilla Pivot Points
The Camarilla Pivot Points indicator is based on mathematics to generate support and resistance levels. It contains a pattern of eight levels ranging from S1-S4 and R1-R4. While all levels determine the direction of the current trend, S3, S4, R3, and R4 are considered by some to be the most important ones. These levels work on the following principle:
C = previous day’s close
H = previous day’s high
L = previous day’s low
The S4 and R4 are considered as the breakout levels. When the price exceeds these levels, traders can take their positions. Besides this, these levels can help traders pinpoint exact entry and exit points.
Depending on the direction of the price, the Camarilla indicator can identify possible trend reversals. Traders can look for these reversals and take positions accordingly.
Support and Resistance indicator conclusion
The support and resistance indicators by defining support and resistance lines can help to measure the current price direction. As with other technical indicators, traders may wish to to combine these tools with other forms of technical analysis.
Support and Resistance Indicators can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.
I would prefer to use the majority of market analysis such as Support and Resistance Indicators on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels, candlestick pattern has been formed or a particular indicator value has been reached.
Support and Resistance Indicators are just one method of market analysis amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing Support and Resistance Indicators into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with Support and Resistance Indicators, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.