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.
What is Support & Resistance?
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.
Support and Resistance Explained
- Are always found below current price.
- Indicate buying pressure.
- Offer a potential bullish bouncing spot or break breakout.
- Are always found above current price.
- Indicate selling pressure.
- Offer a potential bearish bouncing spot or bullish breakout.
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:
- Bullish bounce: price is bouncing at support.
- Bearish bounce: price is bouncing at resistance.
S&R becomes invalid when price manages to break through it:
- Bullish breakout: price is breaking through support.
- Bearish breakout: price is breaking through resistance.
Once S&R is broken, their role can turn around like this:
- Broken support becomes a potential new resistance level.
- Broken resistance becomes a potential new support level.
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.
Why Are Support & Resistance Levels Important?
Support and Resistance (S&R) levels are a key part of any market analysis or chart for a number of reasons:
- Respected: the market uses S&R levels for breakouts and bounces.
- Big market players: every technical analyst uses S&R, also traders at banks and funds.
- Universal: they appear on all instruments and time frames.
- Market phases: they appear during trends, ranges and reversals.
- Time frames: higher time frame are more important because a larger part of the market is using these levels.
- Path of price: S&R are key to understand the “path of least resistance”. More info below.
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.
What is the Benefit of S&R when Trading?
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:
- Identifying high probability reversal zones.
- Avoiding low probability trades into S&R.
- Trade setups upon S&R break or bounce.
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:
- Identifying reversals: MAYBE. Was price going to break or bounce? This was probably a 50-50% coin flip, but we will provide more information about this later on but there are other conclusions traders can make.
- Filtering weak trend trades: YES. It’s not a good practice to enter a short trade right in front of the S&R.
- Trade setups: YES.Waiting for a bearish breakout below the zone or a pullback and continuation signal on a lower time frame is a valid approach.
How do you Spot Support and Resistance Levels?
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.
What Tools and Indicators Show the Best S&R?
There are various ways of analyzing support and resistance levels. Here are the main categories:
- Dynamic S&R levels
- Fixed S&R levels
- Semi-dynamic S&R levels
- Automated S&R levels
- Manual S&R levels
Dynamic S&R Levels
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 S&R Levels
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
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 vs. Manual S&R Levels
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.
Which are the Best Support and Resistance Levels?
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.
Camarilla Indicator & ecs.CAMMACD System
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:
- H5 = (High/Low) × Close
- H4 = Close + RANGE × 1.1/2
- H3 = Close + RANGE × 1.1/4
- L3 = Close – RANGE × 1.1/4
- L4 = Close – RANGE × 1.1/2
- L5 = Close – (H5 – Close)
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:
- General: round and quarter levels
- Weekly or Daily chart: tops, bottoms, Fractals
- 4 hour chart: moving averages, trend channels, Fibonacci levels
- 60 or 15 minute chart: moving averages, ecs.WIZZ, Fractals, trend lines
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.
The Most Precise S&R Levels
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.
How Can Traders Trade at Support or Resistance?
The next part addresses the most important question: how can traders take trades at support and resistance?
Traders can trade in two ways:
- Breakout: a breakout occurs when price pushes through the S&R level.
- Bounce: a bounce occurs when price respects the S&R level.
The best concept for trading S&R is by using the “BPC” concept:
- B stands for breakout or bounce.
- P stands for pullback.
- C stands for continuation.
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.
How “Precise” are S&R Levels?
Pretty precise, but not as precise as you might think. Here are my thoughts:
- When price approaches a round level of 1.10, this does not mean that only the 1.10 level is important.
- It is key to realize that support and resistance levels are only rough zones. Price can push slightly above or below them or even miss them by a bit.
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 Plays Vital Role in Market Structure Triangle
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.
Trend versus S&R
Here is a calculation how traders can judge the likelihood of price bouncing or breaking S&R:
- If the downtrend is strong(er) and the support is weak: price will probably break below the support and show a bearish breakout.
- If the support is strong(er) and the downtrend is weak: price will probably bounce at support and show a bullish bounce.
The opposite is also true for resistance:
- If the uptrend is strong(er) and the resistance is weak: price will probably break above the resistance and show a bullish breakout.
- If the resistance is strong(er) and the uptrend is weak: price will probably bounce at resistance and show a bearish bounce.
S&R Role in Market Structure Triangle
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:
- “bounce or break zones / spots” or
- “decision zones” by myself.
As you can see above, there are 4 options available:
- Bullish breakout.
- Bullish bounce.
- Bearish breakout.
- Bearish bounce.
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.
How Can Traders Measure Break or Bounce Chance?
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.
1) Measuring Support & Resistance Strength
Let’s review key factors to consider when analyzing the strength of S&R. The following aspects make S&R levels stronger:
- Multiple S&R levels at or near the same zone, which is called “point of confluence”.
- Multiple tools and indicators at or near the same zone.
- The more confluence, the stronger the zone becomes.
- S&R visible on multiple time frames.
- Key level(s) on higher time frames, which is called “decision zone”.
- S&R level on 1 time frame above your entry chart.
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.
2) Measuring Trend Strength
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:
- Established trends and trend channels increase its strength.
- Strong momentum candlesticks increase its strength.
The presence of a strong(er) trend or momentum increases the chance of a break.
3) Impact of Price Patterns
Price patterns also play a role in measuring the chance of a break or bounce:
- Divergence patterns make a bounce more likely.
- Reversal chart patterns make a bounce more likely.
- Continuation chart patterns make a breakout more likely.
4) Number of Approaches
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:
- First approach of the trend reaching S&R has a higher chance of a bounce than break.
- Second approach of the trend reaching S&R has a 50%-50% chance of a bounce or breakout.
- Third approach of the trend reaching S&R has a higher chance of a breakout than bounce.
Examples from the Above
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.
Summary of the Above
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.
What is the Target of the Bounce or Break?
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:
- Good to trade bounces at Fibonacci levels.
- Good for trading breakouts with the trend after trend line, MA or fractal break.
- Bad for reversal trades, best to avoid.
- Use the Fibonacci or Wizz tool to determine how far price can last.
- Use wave patterns to distinguish wave 1, 3, or 5 and adjust targets.
Weak trend with divergence:
- Good to trade reversal bounces after candlestick pattern.
- Aim for 21 ema close.
1st reversal swing has occurred after divergence:
- Good to trade reversal bounces at Fibonacci of first correction swing.
- Aim for -27.2% or -61.8% Fibonacci targets after 1st counter-trend price swing.
- Aim for 144 ema close.
Range or sideways movement:
- Good to trade reversal bounces.
- Aim for mid point as target 1.
- Aim for previous top or bottom as target 2.
- Candlestick patterns are good for entries.
What are the Best Time Frames for S&R?
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 higher time frames, like the daily chart, are used to find key support and resistance levels, which could stop the trend or momentum from continuing.
- The middle times frames, like a 4 hour chart, are used for spotting retracements within a trend or a top or bottom in a range.
- The lower time frames, like a 1 hour chart, are used for entries and trading breakouts and bounce.
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.
Summary Support and Resistance
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:
- What is support and resistance?
- Why are support and resistance levels important?
- What is the benefit of support and resistance when trading?
- How to find support and resistance levels?
- How to find support and resistance levels in day trading?
- What tools and indicators indicate support and resistance?
- How to draw support and resistance?
- What are the best support and resistance levels?
- How can traders trade at support and resistance?
- How precise are support and resistance levels?
- Support and resistance plays vital role in market structure triangle
- How can traders measure break or bounce chance?
- What is the target of the bounce or break?
- What are the best time frames for support and resistance?
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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