One of the most important concepts you have to grasp if you’re looking to become a successful forex trader is support & resistance. Support and resistance refer to price points on your chart where the market is likely to change direction, or at least pause. On their MT4 platform, Traders will look to enter long (buy) near an area of support and enter short (sell) near an area of resistance. These areas are usually identified by finding points which have triggered changes in direction in the past, though not always.
In this piece we will cover some of the more popular methods of identifying and drawing resistance and shed some light on what many traders consider to be the ‘holy grail’: support / resistance confluence.
Horizontal Support and Resistance on MT4
This is by far the most basic (and arguably least reliable) form of support and resistance, the trader or analyst simply selects the horizontal line tool in their MT4 platform and clicks to draw a horizontal line at historical turning points. Some traders prefer to use closes and opens, others opt for extreme highs and lows. There are no set rules here: what works for one instrument may not work so well with another and markets are in a constant state of flux. What you will notice though, is that actual turning points ie the high and low prior to reversals, often coincide with a prior close or open.
Other than previous turning or inflection points, another place you might consider drawing a horizontal line (or at least keeping an eye on), is a key psychological level. These take the form of round number handles on the chart ie 1.11, 1.12, 1.13. Though these levels might blow out a little, there is nearly always some sort of reaction at / under / above these levels. In general, the cleaner the handle, the more important it will be be ie 1.1 is likely more important than 1.11 and parity (1.0) is definitely going to attract some attention.
Fibonacci levels are quite interesting, though the fibonacci tool just draws a series of horizontal lines on your chart, these levels can be astoundingly reliable. The standard levels drawn (23.6, 38.2, 61.8) are based on the fibonacci sequence / golden ratio, some traders also add in a 76.8 or 78.6 and though the 50% level is not derived from the fibonacci sequence, it is also very common. If you are attempting to identify support in an uptrend, select the fibonacci tool in your MT4 platform and drag it from the low to the high. Conversely, if you are attempting to identify resistance in a downtrend, drag the tool from the high to the low.
The standard levels you really want to focus on are the 38.2 and 61.8, if you go over your charts you’ll be surprised at just how many times a market corrects 38.2% or 61.8% and then resumes the trend. It’s important to note that there will usually be a little noise around fib levels (or a pair may well bounce before the level), as such it’s important to give your stop and entry levels a little breathing room on either side of key fib levels.
Trend Support and Trend Resistance
Similar to a horizontal line, but drawn at an angle in order to trace a trend. Trend-lines are very popular indeed and it is extremely rare to come across a technical trader that doesn’t use them. To draw trend-line support, you simply select your trend-line tool in the MT4 platform and use it to connect a series of swing lows. Conversely, to draw trend-line resistance, simply use the tool to connect a series of swing highs. In general, trend-lines are more reliable on higher time frames and you should avoid the temptation to draw them at extremely steep angles: markets will often move in quite an aggressive fashion at first, only to correct to a more gentle slope, before continuing to chug along.
Just like fibonacci levels, trend-lines can often be a little noisy so be sure to leave a buffer or wait for a close before exiting or entering a trade based on a trend-line break.
Support and Resistance Zones
These are a relatively new form of support and resistance that are gaining a lot of traction in the online trading community. You may hear them referred to as supply and demand zones or ‘order blocks’. With all the forms of support and resistance we’ve pointed out so far, noise can be an issue: the market will often move past your level, only to snap back, catching you out. Zones essentially remove this issue, rather than a single line, a zone is made up of two lines which designate an area where a market is likely to turn.
In order to draw a support or resistance zone, you’ll need to right click on the toolbar on your MT4 platform and select customize to add in the rectangle tool. You then draw a rectangle around the body of the final / first bars of historical trends. When drawing support, extend the lower bound of the rectangle to the low of the candle, when drawing resistance, extend the rectangle to high of the candle. You will want to select a light colour for your zones so you can still readily see price action occurring in and around the zone.
Once trader begin to look at support and resistance as a zone, rather than a ‘line in the sand’ they often notice dramatic improvements in their trading performance.
The ‘Holy Grail’: Support and Resistance Confluence
Support and resistance levels aren’t magic: they work because other traders have identified the same levels and also look to buy and sell there. As such, if you identify an area which has numerous support / resistance levels ie a trendline coinciding with a fibonacci level or support / resistance zone; it is much more likely that you will see a reaction in this area. Some traders will be trading the trend-line, others will be trading the fib and the best traders will have also identified the confluence and will be gearing up for a big trade. The more factors indicating an area is important, the more likely the rest of the trading world is watching that area too, this leads to higher probability set ups and some truly great trades.
We hope you have enjoyed this piece on identifying support and resistance levels on the MetaTrader 4 platform, happy charting!