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Identifying Relevant Support and Resistance Levels

Multiple-time-frame technical analysis is your early-warning radar system. It alerts you to key support and resistance levels that, if broken, are likely to lead to larger directional breakouts and potential trading signals. of course, the flip side is that if the support or resistance levels hold, price direction is likely to reverse course.

After you’ve gone through and analyzed a currency pair with trend lines in multiple time frames, you’re well on the way to identifying key technical support and resistance levels. But while trend lines are one of the simpler yet more powerful technical tools, there are still plenty of other sources of support and resistance to take not of.

Identifying short-term support and resistance levels on an hourly chart using trend lines, key price points (highs, lows, breakouts), congestion zones, and retracements.

Graph 1 – Hourly EUR/USD showing support and resistance from all forms


Trend lines

To determine support and resistance levels that correspond to the trend lines you’ve drawn, you simply need to place the cursor of your charting system on the trend line at the current time period. your charting system should display the price value of the cursor placement on the right side of the chart; if not, you may have to use the crosshairs tool of the charting system to see the value. Keep in mind that trend-line price values will shift over time based on the slope of the trend line. If you’ve identified a trend line that’s loping steeply higher, for instance, its price value will be higher in later periods. You can run the cursor up the trend line and note the price level and time interval to gauge how much it will change over time.

Highs and lows

After trend lines, markets tend to place the greatest amount of emphasis on period highs and lows as points of support and resistance. You can pinpoint support or resistance levels from highs and lows by simply noting the price high or low, but give yourself a few pips of latitude (5 to 10 pips), because different charting systems have different data feeds, which may have slightly different high/low readings.

When you’re looking at a daily chart, you can pretty easily identify the relevant high or low. But when you’re looking at charts in shorter time frames, it’s not always clear which high/low you should use. A general rule is to look for significant price reactions from recent prior highs and lows.

The more sharply prices move away form a high or low, the more significance that high or low carries as support or resistance. The more slowly or less dramatic the price movement off the high or low, the less significance that high or low usually carries. Look for long tails on shorter-term candlestick charts, like 5-minute or 15-minute time frames.

Congestion zones

Congestion zones are price bands in which prior price action gives way to consolidation, or a relatively short-lived sideways period of price action. Most congestion zones are roughly 20 to 30 pips wide, but they may be larger in more volatile pairs, like GBP/USD and USD/CHF. Unfortunately, there’s no easy recipe when it comes to deciding whether the top or bottom of a congestion zone will act as support or resistance, so you need to factor in the whole zone as a potential source of support of resistance. Prices moving higher, for instance, may stall at the base of a congestion zone, or they may make it all the way to the top. If the zone is cleared, however, prices are likely to move on to the next resistance level.

Retracements

Fibonacci retracements should be drawn after significant directional rice moves when it’s clear (or as clear as it can be) that the directional movement has stopped and reversed direction. You can draw the retracements by using the Fibonacci retracement drawing tool that’s standard in most charting systems. Graph 1 contains a Fibonacci retracement based on the most recent decline, identifying potential short-term resistance levels in the correction higher.