Are you wondering how you can use support and resistance (S&R) levels for your trading? Or do you perhaps feel unsure how to find S&R?
Not suing support and resistance levels is a dangerous practice because you risk missing critical pieces of the puzzle and not fully understanding the price chart.
Today we want to change that and offer you an unique and ultimate guide for support and resistance trading.
Discover how to draw support and resistance levels, how to do support and resistance trading, which support and resistance indicators work well, download the Camarilla indicator, and learn how the Camarilla indi and other S&R levels must be used.
Support and resistance (S&R) levels are a basic pillar of technical analysis (TA). The field of TA is based on patterns in price data and S&R plays a key role.
Learning how to understand, recognise, use and trade based on S&R will, in our view, make your analysis and trading more robust.
Sounds good, but what is S&R?
The simplest way to think about support and resistance is this:
They are price levels or price areas where price changes direction or moves sideways.
In other words, S&R is a price level or a price zone where price has bounced.
We wrote potential bounce or break.How high is this chance?
That depends on both the strength of the S&R and the confluence (multiple levels). But be aware that price reactions tend to be strong on higher time frames.
S&R remains valid when price is reversing or “bouncing” at S&R:
S&R becomes invalid when price manages to break through it:
Once S&R is broken, their role can turn around like this:
Examples of support and resistance levels are tops, bottom and round levels but this article will dive into more examples and which ones I use later on.
Support and Resistance (S&R) levels are a key part of any market analysis or chart for a number of reasons:
Support and resistance levels are like the “footprints” of the big market players. Other traders can understand their moves better if they analyse S&R.
Support and resistance lines are a key aspect of trading and it is one of the key components of understanding the market structure (see paragraph above). Without it, traders would be lost in the woods, it would be the equivalent of driving on the roads blindfolded.
The 3 major benefits of S&R are:
Let me show you a practical example. There was a downtrend visible on the USD/JPY 1 and 4 hour charts but the currency pair was approaching a large support zone (green box) on the daily chart. The bearish momentum is indicated by the orange arrow on the image below.
Let’s review all 3 benefits when reviewing this chart:
There are a number of mistakes traders make when drawing S&R on the chart.
Mistake 1: they expect a support level to act as support even though price has already broken below the level or zone. The same is true for resistance when price has already broken above it. Traders must look for unbroken support or resistance levels.
Mistake 2: they use levels from a very long time ago. Always keep in mind that most recent price action has more weight and more importance.
Mistake 3: they treat all S&R levels the same. Support and resistance levels are more important if price has bounced significantly at this level in the past. So start on the right and then work your way back to the left.
Mistake 4: they think trading each and every S&R level is the right way to go. The truth is that this just creates a messy chart, which does more harm then good. Focus on only drawing the significant S&R levels.
The main step is to look for recent S&R levels that have been “respected”. The market respects a support and resistance level by bouncing at this level. The stronger the bounce, the more powerful the S&R level becomes.
Another tip is to draw a “zone” rather than a single level because price can overshoot S&R due to price momentum and market volatility. We use these buffer zones for S&R for all tools and indicators too like moving averages where we prefer to work with moving average bands (high, low, close) rather than just one moving average (close).
Also do not be afraid to indicate differences between S&R levels. Some S&R levels will be more important than others and it’s good to indicate S&R as major or minor levels. The best way to do so is to use different shades of color for the S&R lines.
There are various ways of analyzing support and resistance levels. Here are the main categories:
Dynamic levels are support and resistance levels that changes when price action moves. A moving average for instance is S&R level that is updated with each new candle. The same is true for the Ichimoku indicator. Each new candle will create a new calculation ofthe S&R.
Here is a part of the list: moving averages, Ichimoku, Keltner channels, Parabolic, oscillators, Alligator, average true range, Murrey Math and many more.
Fixed levels are support and resistance levels that do not change no matter how much price moves. A 1.10 round level will always remain S&R at 1.10 regardless of how price moves. The same is true for a top, bottom and Fractal.
Here is a part of the list: round levels, quarter levels, tops, bottoms, Fractals, pattern levels, candle low, candle high, candle open, candle close.
Semi-dynamic S&R levels are a mixture. They tend to change at a fixed / steady rate of increase and decrease. This is different when compared to a fixed level because: a) the fixed one does not change at all and b) the dynamic one changes more rapidly.
The trend line is a perfect example for instance as it has a steady angle. The same is true for a Fibonacci level, the Fibs can be moved once the trader changes the tool.
The Camarilla Pivot Points are a perfect example as well. The Camarilla levels are changed automatically at each new candle, such as 4 hour, daily or weekly candle. In the image above you see the ecs Camarilla indicator, which has special features such as multiple time frame Camarillo levels.
A pivot point calculator is not a relevant tool anymore. There are automated ways to plot the Pivot Points on the chart, without having to do the manual work. You can download the Camarilla indicator and a handout for free by clicking on the banner below.
Here is a summary of the semi dynamic S&R levels: Pivot Points, ecs.Camarilla Pivots, Fibonacci, trend lines.155.
Automated support and resistance requires no work from the trader whereas manual levels need to be adjusted manually. Automated S&R levels are moving averages as the MT4 platform does the calculations for you. Manual S&R levels are Fibonacci levels and trend lines.
In the image below you will find an overview of some of the S&R indicators.
We certainly have our own favourite support and resistance levels… This will vary from trader to trader as well. For instance, Nenad is a master trader with using Camarilla Pivot Points whereas my main tool are moving averages.
First of all, you can download the free version of the Camarilla indicator and test out the S&R indicator for yourself. It is a very accurate tool for spotting and trading support and resistance levels as you will see once you use it. There is also a paid version of the Camarilla indi, which is an advanved and enhanced version. This is obviously included in the ecs.CAMMACD system.
Second of all, let’s walk through some of interesting basics about the Camarilla indicator.
There are numerous types of pivot point indicators available: standard ones, Fibonacci, support and resistance, hourly one, Murrey Math and the Camarilla.
The Camarilla indicator uses 6 simple levels on the chart. These are named and calculated as follows:
I myself am a big fan of the Camarilla Pivot Point indicator. The Camarilla indicator is the best because:
• It identifies support and resistance
• It helps with determining the trend
• It adds confluence to my charts
• It shows bullish & bearish zones of day & week
• It spots triggers
• It provides clear entry and exit points
The S&R tools that I think are relevant depends on the time frames. Here is a rough guide that I use for these charts:
These might seem like a lot but I do not use all of them at the same. I am only listing my favourite S&R levels per time frame. When trading the markets, I always use 3 time frames to make the best decisions about S&R.
Now it’s time to explain more about these indicators.
Murrey Math Levels for filtering setups: the best indicator for the daily chart is the Murrey Math indicator, which is based on Fibonacci levels and octaves. It plots automated support and resistance levels and is also updated automatically.
Fibonacci tool for finding entries and targets: the Fibonacci levels are a music to my ear. They provide excellent and precise reversal spots, entry spots and targets.
Fractals for stop loss placement: Fractals show where the price action respects S&R. Using them for a stop loss is useful as it provides an extra layer of defense.
Moving averages (MAs) for bounce or break spots: the MAs are an excellent tool for measuring the psychology of the market and offer excellent break or bounce spots.
The ecs.WIZZ tool: the tool shows where there is space between S&R level or not. It plots key targets on the chart and traders can see where price is expected to be corrective or impulsive.
The next part addresses the most important question: how can traders take trades at support and resistance?
Traders can trade in two ways:
The best concept for trading S&R is by using the “BPC” concept:
Breakouts and bounce: candlesticks . The best way for traders to measure breakouts or bounces is by using candlesticks, which help measure the reaction of price in the decision zone or point of confluence.
Example: a bullish 4 hour candle above a 4 hour trend line with a close near the high will probably create a good breakout.
Pullback: FIbonacci tool. Once price has bounced or broken, there could be a retracement first before price continues with the bounce or break. The best tool for this Fib levels.
Example: a bearish break of the trend line and fractal sees a bear flag chart pattern correct up to the 38.2% Fibonacci level, which could be a good retracement spot.
Continuation: trend lines, Fractals, MAs. Once price has completed its pullback, it could be ready to continue in the same direction as the first breakout. A new break of the trend line, Fractal and/or moving average (MA) would be the best way to measure it.
Finally, pending orders and market orders are the two entry options. I prefer market orders as I often use candlestick patterns and candle reactions for entries. Nenad, however, uses regularly pending orders based his CAMMACD system at S&R confluence.
Pretty precise, but not as precise as you might think. Here are my thoughts:
For instance, the round level of 1.10 would indicate to me that price could stop anywhere between 1.0975 and 1.1025 and it would still be considered a respect for the 1.10 level.
Of course, bigger round levels like 1.10 have more more weight and importance then smaller levels like 1.1350. But even with the latter S&R level, price might stop within a margin of 5 pips above or below it.
The same is true for all other support and resistance levels, including Fibonacci levels, moving averages, trend lines, etc. S&R levels are always a zone, never ever just one level.
How can traders trade them? It’s time to see if it’s possible to measure the breakout chance.
S&R is in fact a very powerful tool because price will always choose a direction (“path”) where it finds the lowest barrier (“resistance”). Let me use examples to explain.
Here is a calculation how traders can judge the likelihood of price bouncing or breaking S&R:
The opposite is also true for resistance:
Conclusion: the “battle” between S&R and trend / momentum is an important equation that determines the “path of least resistance”.
Support and resistance levels are therefore also called:
As you can see above, there are 4 options available:
Price patterns are the 3rd dimension within the triangle of analyzing the market structure and help explain the psychology behind price. Key price patterns are divergence patterns, wave patterns, chart patterns, Fibonacci patterns, time patterns, tend line patterns and fractal patterns.
This is perhaps the most difficult question… but we do use a rough formula for making this decision. As explained at the beginning of this article, the trend and S&R are the first two key ingredients whether price will break or bounce. Patterns offer a 3rd angle to analyze the market structure.
Let’s review key factors to consider when analyzing the strength of S&R. The following aspects make S&R levels stronger:
Of course, the opposite makes S&R weaker: less confluence, lack of key levels, and lower time frame S&R are not as important and indicate weakness.
The 2nd aspect of the equation is trend and momentum. This is even more difficult to judge then S&R but here are some guidelines for trend strength:
The presence of a strong(er) trend or momentum increases the chance of a break.
Price patterns also play a role in measuring the chance of a break or bounce:
The last factor in analyzing breaks or bounce is how often a S&R has been challenged. Here is how the logics works when S&R and the trend are roughly equal:
The four steps above are not a simple math formula, unfortunately. But with time and experience, it does become easier to recognize what is more likely.
Let me show you a concrete example. Let’s say a 1 hour strong bearish momentum is approaching a key 1.10 decision zone which also offers multiple points of confluence on the 4 hour and daily chart for the very first time. What is more likely?
Answer: a bullish bounce, because the multiple S&R of the higher time frame is expected to be strong then a momentum push on a lower time frame like a 1 hour chart, plus it’s the first approach.
One more example. Let’s say a 4 hour uptrend is approaching a 1.15 resistance round level for the 3rd time but otherwise there is not much resistance. What is more likely?
Answer: a bullish breakout.
Not every situation will be clear but these 4 aspects will help every trader make a better judgement about the strength and weakness of S&R and whether price will break, bounce or reverse.
How far can the breakout or bounce last is the final question we want to address. Our answer will depend on whether price is trending, ranging, or reversing.
Trend or strong trend:
Weak trend with divergence:
1st reversal swing has occurred after divergence:
Range or sideways movement:
The best combination for analyzing the market structure is using a higher, middle and lower time frame. They all play a different role in my approach:
The best method is to apply three time frames for analyzing the chart. Three levels of zoom provide optimal information while not overcrowding and overloading our analysis.
Keep in mind that S&R levels on a 1 minute chart have no expected effect on a weekly chart. You should preferably use the S&R level on the same high time or one time frame lower. Very max, time frames lower.
For example, a daily support trend line could be used on a daily and 4 hour chart, but would not be that good for a 1 hour chart and is unusable on a 15 minute chart.
Support and resistance (S&R) levels are important decision zones for the market because they offer key bounce or break zones.
S&R is also an important part of analysing the charts together with trend and patterns.
In this article we discussed several parts:
We hope that this article helps your trading. Please let us know your thoughts and ideas down below in the comments section.
Many green pips,
My twitter: @ChrisSvorcik
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