The more you read charts, the better you become at it, that’s almost a given. However, there are certain tools which are relatively easy to understand and use. Support and resistance levels fall into this category. Reading support and resistance levels is an extremely useful tool, not just for forex trading, but for trading across a range of assets.
Identifying support & resistance levels
When looking at a chart you will see that there are certain levels where the price action encounters problems progressing, often stalling before falling lower. These areas are termed support or resistance levels.
In a long position:
When you are going long the resistance level is the highest point when the price advances before a pull back. Meanwhile the support is the lowest level hit before the price moves higher again.
In a short position:
The reverse stands true for a short position. So, a resistance level is the lowest level struck before the price rebounds higher. Whilst the support is the highest price reached before the price starts to ease down again.
Don’t get heavy handed
When drawing support and resistance levels on a chart don’t go overboard. If you end up putting to many lines into your chart you are going to cover the most important part of the chart, the price action. Try to just draw on the most respected levels, these are the levels where the price has encountered difficulty more frequently.
Support and resistance zones
It can also be useful to consider support and resistance levels as zones rather than single figures. Pulling up a chart you can find plenty of examples where the prices looks as if it has broken through a support only to bounce back up shortly after. It is worth keeping in mind, the more a price “tests” or bounces off a level the stronger than support or resistance becomes.
It often helps to use line charts here rather than candlestick charts, as line charts just use the closing price. Sometimes the candles, which include extreme highs and lows can sometimes confuse the picture. So, using the line chart, in addition to thinking of supports and resistance as zones will go some way to help identifying when the price is really breaking through a support or resistance level.
It may also be useful to use a line chart rather than a candle sticks chart. This is because line charts focus on just the closing price rather this confusing the picture with.
Vantage FX offers its clients a very comprehensive charting package across its suite of platforms. The MT4 platform which Vantage FX clients are also offered, is considered the gold standard of platforms and charting. Further information on how to make the most of the MT4 charting packages can be found on the Vantage FX website. The MT4 charting guide provided by Vantage FX shows you how to customise your charts including how to draw on your support and resistance lines. The guides are simple and use clear visuals and snapshots of MT4 to make them easy to follow.