Most times when discussing support and resistance we are generally referring to horizontal areas where price has tested a level previously and generally more than once. There are many other forms of support and resistance that speculators need to take into consideration, some of these are:
- Moving averages
- Pivot points (floor pivots)
- Trend lines
- Fibonacci levels
- Round number levels
Lets now look at these and how they could be used effectively in our trading.
Moving Averages
Moving averages can be used effectively in both a trending environment and also in mean revision environment.
Moving averages can be excellent forms of support and resistance. If you look at any price chart and overlay a moving average just watch how price is drawn back to the MA and also how often when touched or just breached it then reverses and moves away again. One use of these MA’s is that they work quite well in many situations as a trailing stop. This is because they are a great form of support and resistance and if it doesn’t hold then it is a great time to take profits. It is much easier to show this in a chart so have a look at this chart and see just how well this can work.
click image for larger view
Pivot Points
Pivot points or floor pivots as they are often referred to are also excellent forms of support and resistance. These pivot points have been around for a very long time and have been used by floor traders for just as long. These points are a nice simple way for traders to have some idea of where the market is heading during the course of the day with only a few simple calculations. All you need is the markets previous days high, low and closing price. The calculations I use to get these points are-
Resistance 3 = High + 2*(Pivot – Low)
Resistance 2 = Pivot + (R1 – S1)
Resistance 1 = 2 * Pivot – Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot – High
Support 2 = Pivot – (R1 – S1)
Support 3 = Low – 2*(High – Pivot)
But there is a much easier way to calculate these levels and that is to get them from one of the many sites on the web that publish them every day, a good one that I found is HERE . The reason that so many of these levels hold is quite simply that a lot of other traders are using the same methods and when you get enough people with the same opinion then the market moves in their favor. Pivots are great places to both enter the market and take profits depending on each individual situation. As always a picture is worth a thousand words and the following chart displays a good example of floor pivots acting as support and resistance.
click image for larger view
In the above image I am using a custom Pivot indicator that redraws the pivots each day for Meta Trader, if anyone would like a copy please contact me through my contact page and I will send you a copy. It is quite obvious in the above chart just how well these Pivot Points do work.
Trend Lines
Trend lines much like moving averages are excellent forms of support and resistance as well, they also are an excellent tool to use as a trailing stop. This chart demonstrates this well.
click image for larger view
Fibonacci
Fibonacci has been around since the dark ages and is a tool that is used regularly by many traders. There are many Fibonacci tools out there, these include retracements, extensions, arcs, fans and cycles. I personally only have used retracements and extensions in my trading so I will only discuss these here. All good charting packages come equipped with these tools and are easy to use. I won’t go to much into explaining Fibonacci, if you want to know more just search the net or you could check out Neal Hughes’s course on Fibonacci trading which is quite good. These levels are quite effective and can be used on all time frames.
click image for larger view
click image for larger view
Round Numbers
All humans seem to have a natural affinity to round numbers and anything ending in 00 or to a lesser extent 50 , these can be effective levels of Support and Resistance. When looking at any chart just draw some lines at these levels and note how price reacts, it is amazing just how many times price reverses at them. Please note that again you are looking to this level as a general area as all traders know this and thus place there orders either side of these round numbers and thus price can be seen to spike through them sometimes and then reverse. Check out this chart for an example of this at work.
click image for larger view
So as you can see Support and resistance comes in many forms and used correctly can define areas where traders can enter the market, take profits and also gives a logical place to put your stops. I believe for all technical traders Support and Resistance trading should play a major role in there trading plan.
Perry
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