A Guide to Support and Resistance Indicators

Admirals
40 Min read

Support & resistance indicators are very important tools in Forex & CFD (Contracts For Difference) trading. There are many applications for support & resistance trading, not just in Forex, but also in other financial markets. In this article, you will discover 5 of the best support and resistance indicators, a detailed explanation of what support & resistance (S&R) levels are, some support and resistance trading strategies and much more!

Let's begin!

What's Support and Resistance?

Perhaps you've been asking yourself, "What does support and resistance mean in Forex?", or "What is a good support and resistance trading strategy?". If so, you're in the right place.

Support and resistance levels are integral to any financial market.

What support and resistance is in Forex is similar to what it is in the stock market. To understand what it is and how it works, it's important to first ask, "What causes support and resistance?".

Market participants define support and resistance levels, which essentially represent supply and demand, or the order flow, which can rapidly shift.

It is here that the bulls and bears oppose, with a winning side always prevailing, one way or the other.

The price can be submissive or reactive to a price level, where buyers or sellers match each other.

There are hundreds of methods for locating support and resistance. If a trader decides to place all of the lines on the chart, they would not even be able to see the price on the chart.

Why? Because the price would simply vanish behind the lines. Obviously, traders must choose the best S&R levels, otherwise, the chart becomes unreadable and unusable.

So, how are support and resistance calculated? How do you draw support and resistance? And how can traders distinguish the most important levels? We'll answer these questions shortly.

But first, one of the most important questions to ask is, what should you consider as being important support and resistance lines?

S&R only becomes valuable when the market actually respects the levels in the majority of the cases. If an S&R level is only used occasionally or rarely, there is no benefit for a trader to place it on the graph.

To summarise: Traders are looking for the very best and most respected S&R levels and the top Forex and stock support and resistance indicators to help us do this. Once we've found the best support and resistance indicators, we can apply them to a support and resistance trading strategy to help us identify trading opportunities.

The Best Support and Resistance Indicators and Strategies

If you've been asking yourself, "What is a Forex trading support and resistance strategy?", you're in the right place.

It's now time to look at some of the best support and resistance indicators and the support and resistance strategies that can be used with them. In the following sections, you'll discover some support and resistance indicators and strategies to help you learn how to trade support and resistance.

1. Fibonacci Support and Resistance

The first support and resistance indicator on our list is the Fibonacci.

You might be wondering how to find support and resistance in day trading. We can tell you that this should be a straightforward process with the Fibonacci support and resistance indicator. This is one of the top resistance and support indicators.

Fibonacci numbers, the great work of the 13th-century Italian mathematician – Leonardo Fibonacci – have been one of the main secrets in creating many technical indicators that have helped to conduct precise technical analysis.

What is Fibonacci?

Fibonacci is a series of numbers that results in a particular number, by adding the previous two numbers, for example, 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc.

These numbers are widely used to calculate targets and entry points while trading stocks, commodities, and, especially, in Forex during trends that occur in the market. Remember, Fibonacci is used only in trending markets, and should always draw from left to right.

So, how to use this support and resistance indicator? Fibonacci retracement numbers are used to indicate targets and entry points during trending markets. They signal the reversal points where traders might find entries during retracements in a trend. In a downtrend, you plot Fibonacci levels from top to bottom (always left to right).

  • Point A is the swing high
  • Point B is the swing low
  • Point C is where the retracement has potentially ended, and new trend movement may start (entry point)

Depicted: USD/JPY H1 chart - Admirals MT4 - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

With this support and resistance trading strategy, in an uptrend, you plot Fibonacci levels from bottom to top (always left to right).

Depicted: GBP/JPY H4 chart - Admirals MT4 - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

  • Point A is the swing low
  • Point B is the swing high
  • Point C is where the retracement has potentially ended, and a new trend movement may start (entry point)

The Fibonacci Expansion/Projection support and resistance trading strategy provides potential levels for taking the profit once the starting point of the current movement has already been tested, and the price continues trading in the same direction.

Using this support and resistance trading strategy, let's take a look at an uptrend target example with the GBP/JPY shown above: (Fibonacci expansion is plotted in red)

  • Point 1 is the starting point
  • Point 2 is the highest point
  • Point 3 is the end of retracement (also aligned with Fibonacci retracement)

Depicted: GBP/JPY H4 chart - Admirals MT4 - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

The main targets with Fibonacci Expansion are:

  • 0.618 - FE 61.8
  • 1 - FE 100.0
  • 1.618 - FE 161.8

Let's move on to the next support indicator in our list.

2. Wolfe Waves

The second support and resistance indicator on our list is Wolfe Waves. These are a naturally occurring trading pattern present in all financial markets.

Originally discovered by an S&P500 trader named Bill Wolfe, Wolfe Waves work a bit like Elliot Waves, albeit there are some differences in charting techniques.

Patterns identified as Wolfe Waves are natural and reliable reversal patterns, present in all markets and timeframes, which makes it a good resistance and support indicator.

A Five-Wave Pattern

As the name suggests, this pattern is composed of five waves showing supply and demand towards an equilibrium price.

Wolfe Waves usually develop on all time-frames, and are used to predict where the price is heading to, and when it might arrive there. If identified correctly, Wolfe Waves can be used to accurately predict the scope (equilibrium price) of the underlying security, and to anticipate price reversals that are likely to cause big price movements.

The most important thing with this support and resistance trading strategy is to identify the prevailing trendline, and ensuring that it has at least four touch points.

The next important factor is to locate a clear break of this trendline. Keeping in mind that reversals in the market only occur 20% of the time, the last high/low should be challenged.

The Wolfe Secret is to use this point for your trigger on the price pattern. While it's not an indicator that shows support and resistance in a traditional way, the idea is that the prevailing trendline becomes a diagonal support/resistance line that you use to identify this entry point.

Identification of the Wolfe Wave

In this support and resistance trading strategy, the Wolfe Wave consists of a 1-2-3-4-5 wave formation, with 2 and 4 referring to the retracement waves seen in the Wolfe Wave formation. Wolfe Wave traders distinguish between two different types of Wolfe Waves – strict waves and modified waves.

Strict Wolfe Waves are charted by using these rules:

  • Waves 3-4 must remain within the channel created by 1-2
  • Wave 1-2 equals waves 3-4
  • Wave 4 is between waves 1 and 2
  • There is the regular time between all waves
  • Wave 5 exceeds the trendline created by waves 1 and 3

Depicted: GBP/JPY H1 chart - Admirals MT4 - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

The main difference between strict and modified waves is that in a modified Wolfe Wave, point 4 is found within the channel created by waves 1-2.

Depicted: GBP/JPY H1 chart - Admirals MT4 - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Depicted: GBP/JPY H1 chart - Admirals MT4 - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Trigger: After the perceived Wolfe Wave pattern has been identified, place the limit order trigger entry near the diagonal line resistance area of the price pattern. Usually, the trade is taken when the price closes above the trendline created by waves 1 and 3.

Stop: The last high/low of the pattern.

Profit Target: Point 5 is the trade entry point, and is expected to hit the EPA (the take-profit point) by meeting a line drawn from point 1 which also intersects with point 4. In the example below, we can clearly see that the EPA (expected price at arrival) has been met and overshot:

Depicted: GBP/JPY H1 chart - Admirals MT4 - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

3. Camarilla Pivots

The third support and resistance indicator on our list is the Camarilla Pivots.

The most basic and simplistic definition of the Camarilla is that it is an indicator for support and resistance that defines trend and range.

Traders can simply and quickly define whether a market is trending down, up, or if it is ranging by looking at the Camarilla support and resistance indicator for a few seconds.

Simply put, the Camarilla support and resistance indicator provides valuable, simple, and automated S&R levels.

The Camarilla is extremely well-respected by professional traders.

One of the main reasons for this is that institutional traders use this Forex support and resistance indicator very intensively.

The other reason is that the market naturally gravitates around the Camarilla levels, and uses them as the centre or boundary for daily and weekly price action.

The other advantages of Camarilla support and resistance indicator include:

  • It is generated automatically every trading day
  • It requires no adjustment or manual work by the trader
  • It keeps the chart simple with six basic lines (3 red; 3 green)

Trend: The price is in a trending mode when it is outside of the H3 and L3 zones. That means either above the H3 for an uptrend or below the L3 for a downtrend.

Range: The price is in a range mode when it is in between the H3 and L3 zones.

If you're interested in trying the Camarilla support and resistance indicator (or any of the other indicators on this list) without risking your real money on the live markets, there's no better way to do it than with a FREE online demo trading account.

You can trade with virtual currency, using real-time market data and insights from advanced traders, without putting any of your capital at risk. That's right. With a FREE Admirals’ demo trading account, traders can test their strategies and perfect them without risking their money.

A demo account is the perfect place for a beginner trader to get comfortable with trading, or for seasoned traders to practice. Whatever the purpose may be, a demo account is a necessity for the modern trader. Open your FREE demo trading account today by clicking the banner below!

Basic Camarilla Support & Resistance Scalping - Support and resistance strategy

It's time to look at a Camarilla support and resistance trading strategy.

Camarilla can be traded in the form of:

  • S&R basics
  • S&R breakout.

Scenario 1: The Market opens between the H3 and L3 levels

This support and resistance trading strategy is used when the market opens between the H3 and L3 levels. In this case, you must wait for the price to approach either of these two levels. Potential trades can be made when the price hits the H3 or L3.

Shorts:

Bounce trade: If we want a short trade, we will aim for the price to reject at the H3 level before entering the trade. Stops are placed above H4 for short trades.

Breakout trade: If we want a short breakout trade, we need to aim for the price to move below the L3 level before entering the trade. Stops are placed above H3 or H4 for short trades.

Depicted: EUR/CAD M30 chart - Admirals MT4 - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Longs:

Bounce trade: If we want a long trade, we will aim for the price to bounce at the L3 level before entering the trade. Stops are placed below L4 for long trades.

Breakout trade: If we want a long breakout trade, we need to aim for the price to move above the H3 level before entering the trade. Stops are placed below L3 or L4 for long trades.

Depicted: GBP/JPY M30 chart - Admirals MT4 - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Scenario 2: The Market Opens Outside the H3 and L3 Levels

This support and resistance trading strategy is used when the market opens outside H3 and L3.

In this case, we should wait for the market to retreat through the L3 or H3 level – as we will then trade with the trend, and once again, place a stop-loss somewhere before the matching H4 or L4 level.

This usually happens if the market opens with a gap.

This can be a slightly dangerous scenario if the gap is about to close. However, some traders use it in the form of S&R scalping, aiming for 10-15 pips only.

The open price is between H3 and H4 (long trades only):

  • Buy when the price moves above H4
  • Stop loss is just below H3
  • Target is the H5

Depicted: GBP/AUD M30 chart - Admirals MT4 - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

The open price is between L3 and L4 (short trades only):

  • Sell when the price goes below L4
  • Stop-loss is just L3
  • The target is the L5

Depicted: USD/CHF H1 chart - Admirals MT4 - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

4. Murrey Math Lines (MML)

Depicted: USD/CHF H1 chart - Admirals MT4 - Murrey Math indicator - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

The fourth support and resistance indicator on our list is the Murrey Math Lines (MML).

According to Gann Theory, prices usually move in the form of octaves. In Murrey Math lines, this is represented by 1/8's. These 1/8's are points of price support and resistance, making this an interesting indicator for support resistance lines.

If we provide these octaves with different characteristics of price action, each Murrey math line has its own property in a support and resistance trading strategy.

8/8 and 0/8 Lines (Ultimate S&R)

These lines are supposed to be the hardest to penetrate on the way up and give the most significant support on the way down. (Prices will likely reject these lines on the first test and will hardly penetrate above).

7/8 Line (Weak, Stall, and Reverse)

This line is a weaker resistance. If prices run up too fast, and if it stops at this line, they might reverse down quickly. If the price does not stop at this line, it should move up to the 8/8 line.

6/8 and 2/8 Lines (Reversal Pivots)

These two Murrey lines are second only to the 4/8 line in their ability to force prices to reverse in the opposite direction.

5/8 Line (The Top of Trading Range)

The prices usually spend 40% of the time moving between the 5/8 and 3/8 lines. If prices move above the 5/8 line, and stay above for some time, the market is said to be selling at a premium spot compared to what one wants to pay for it.

Prices might remain above this line in the "premium area".

If, however, the price drops below the 5/8 line, there is a chance it will drop further, searching for support at a lower level.

4/8 Line (Major Support/Resistance)

This line provides the highest amount of support and resistance. This line acts as a solid support when prices are above it, and as the dominant resistance when prices are below it. This price level is one of the best levels to place a new sell and buy.

3/8 Line (The Bottom of Trading Range)

If the price is below this line and moving upwards, this level acts as a resistance and should be difficult to penetrate. If the price goes above this line and remains above it for some time, we might say that there is a tendency that the price will remain above this line, and may spend approximately 40%* of the time moving between this line and the 5/8 line.

1/8 Line (Weak Level, Stop and Reverse)

This line has a weak level of support. If the price drops towards these levels too fast, and if it stalls at this line, then it might reverse up quickly. But if the price does not stop at this level, it might move down to the 0/8 line.

There are standard Murrey Math Lines (MML) principles, and traders use them to define clear S&R levels for their trading strategies. Some MML S&R indicators use +1/8, +2/8, and -1/8, as well as -2/8 octaves. When these octaves are broken, the MML S&R indicator will print a new octave.

Murrey Math lines are a top resistance and support indicator for levels at varying strengths, making them quite popular.

You can get a highly detailed outline of Murrey Math trading in video format with expert trader Jens Klatt below:

Support and Resistance as a Part of Technical Analysis

Each day, traders start their trading journey in the world's largest financial market, Forex. Novice traders aim to benefit from the enormous volatility taking place in the $5.3 trillion average daily trading volume movements.

The traders, being new to the market, aren't expected to make bold steps, and those who do take such steps should trade with a thorough analysis of the Forex market.

The market has its rhythm; it is better to identify the underlying movement of the pair, and then trade, rather than trade based on gut feeling.

One of the key types of analysis is technical analysis. This school of technical study has an underlying assumption that "history repeats itself", and is based on the historical movement of the underlying currency pairs/stocks/commodities, etc.

At the end of thorough technical analysis, a trader infers important supports and resistances which should be considered while deciding on a trade opportunity.

A good example of one such basic tool of technical analysis is "Fibonacci" which we explored in this article, as well as various other indicators for support and resistance to determine significant support and resistance levels, which can be useful for a novice trader.

They are a key component of a support and resistance trading strategy and traders need to understand them when learning how to trade support and resistance.

To learn more, check out this video with expert trader Markus Gabel where he discusses choosing support and resistance indicators in your trading and signs to look out for when a price might be breaking through these levels.

How do You Determine Strong Support and Resistance?

Substantial support and resistance regions are price levels that recently led to a reversal of the trend.

A simplified example can be used to illustrate this point.

If the price was trending upward and switched to a downtrend, this price level where the trend reversed is considered a strong resistance. The point where the downtrend stops and reverses into an uptrend is also considered a strong support level.

However, in the markets, identifying strong support and resistance levels can be tricky, which is why traders use support and resistance indicators.

Psychological Levels of Support and Resistance

Psychological levels are not the support and resistance lines produced by a support and resistance indicator. To understand psychological levels of support and resistance, we need to understand a simple psychological concept.

Often, the price will test certain psychological levels, and when the price ends with multiple 0's, these are often called "psych" levels. Humans tend to gravitate toward round numbers when discussing price levels, particularly in Forex.

To illustrate, when traders discuss the future value of the Euro, they are unlikely to give an answer like 1.18732 or 1.20345. Rather, they are more likely to round off their orders or price forecast to something simpler, like 1.1800 or 1.2000.

Often, we will see a cluster of orders around these big round numbers, creating stronger levels of S&R.

In addition, the more common psych levels usually appear when the price has two zeros at the end, such as 1.1800 or 112.00. However, even more powerful psych levels would end with three zeros, such as 1.2000 or 110.00. Additionally, the most powerful psych levels of all, end with four zeros, for instance, 1.0000 or 100.00.

Before we finish this article, we're going to answer a few more specific questions traders have regarding support and resistance indicators and the strategies to use with them. 

Support and Resistance Strategy for Binary Options

The support and resistance trading strategies discussed above can be used as a support and resistance trading strategy for binary options in both long and short-term binary trading.

With them, you will be considering historical price levels that a specific trading instrument reached and reversed in a similar way in which you would do while support and resistance trading another market.

Support and Resistance Intraday Strategy

Below are some basic components of a support and resistance intraday trading strategy:

  1. Identify the important support and resistance levels: you can use the support and resistance indicators mentioned above
  2. Find Important Event Level: these are important levels where major trading occurs. In 4-hour and daily charts, some levels may serve as a support before switching to resistance once the price breaks it, reversing the motivation of buyers and sellers.
  3. Identify Intraday Near-Term Levels: If you can establish your price direction from important levels and event levels, you will have done the majority of the work to make an intraday trade. Next, you'll want to identify intraday near-term levels on the 15-minute chart to enter. Near-term levels are the levels very near to the asset's current price. Knowing the current direction of the price will allow you to anticipate that the price will move in your direction via creating price action signals at intraday levels. 
  4. Confirm the Market Directions with a Top to Bottom analysis: This is a review of steps 1 to 3. It's important to confirm that these event levels, important levels and near term levels are suggesting the same direction. If you notice that the price is under important levels, you will aim to sell. Confirming this whole process is an essential step to ensure you are not making any moves too soon. Traders can feel like they are under great pressure when sitting in front of the live charts. 
  5. Enter the Trade
  6. Set a Stop Loss and Take Profit
  7. Trade Management Idea: It's important to always apply fundamental risk management principles to help you avoid incurring losses you can't afford.

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About Admirals

Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of, or recommendation for, any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks

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