Delgado - Forex: Technical Analysis The Support and Resistance.

TASUPPORT&RESISTANCE
IntroductiontoTechnicalAnalysis

www.ThinkForex.com 2 info@ThinkForex.com

Content
RiskWarning.....................................................................................................................................................................3
SUPPORT&RESISTANCEEXPLAINED:...............................................................................................................................4
Support&ResistanceInterchange............................................................................................................................5
MEDTHODSTOIDENTIFYS/R:...........................................................................................................................................6
HorizontalS/R...............................................................................................................................................................6
Zones............................................................................................................................................................................7
LongWicks/Tails.........................................................................................................................................................8
Channels/Trendlines...................................................................................................................................................9
PivotPoints.................................................................................................................................................................10
Fibonacci.....................................................................................................................................................................11
MovingAverages(MA)...............................................................................................................................................12
UsingConfluencesofS/R............................................................................................................................................13
Confluences:Trendline&HorizontalS/R...................................................................................................................13
Confluences:Fibonacci;HorizontalS/R;MovingAverages........................................................................................14
Confluences:TrendlineResistance;200eMA;PotentialChartPattern......................................................................15
Confluences:Fibonacci;PivotalS/R;RejectionSpikes...............................................................................................16
SUMMARY:......................................................................................................................................................................17
REDUCEYOURLEARNINGCURVE:..................................................................................................................................18

TASUPPORT&RESISTANCE



RiskWarning
TradingintheForeignExchangeandCFDsmarketinvolvesasignificantandsubstantialriskoflossandmaynotbe
suitableforeveryone.Youshouldcarefullyconsiderwhethertradingissuitableforyouinlightofyourage,income,
personalcircumstances,tradingknowledge,andfinancialresources.Onlytruediscretionaryincomeshouldbeused
fortradingintheForeignExchangeandCFDsmarket.Anyopinion,marketanalysisorotherinformationofanykind
containedissubjecttochangeatanytime.Nothinginthispresentationshouldbeconstruedasasolicitationtotrade
intheForeignExchangeorCFDsmarket.IfyouareconsideringtradingintheForeignExchangeorCFDsmarket,
beforeyoutrade,makesureyouunderstandhowthespotmarketoperates,howThinkForexiscompensated,
understandtheThinkForextradingcontract,rulesandbethoroughlyfamiliarwiththeoperationofandthe
limitationsoftheplatformonwhichyouaregoingtotrade.AFinancialServicesGuide(FSG)andProductDisclosure
Statements(PDS)fortheseproductsisavailablefromTFGLOBALMARKETS(AUST)PTYLTDbyemailing
compliance@thinkforex.com.au.TheFSGandPDSshouldbeconsideredbeforedecidingtoenterintoanyDerivative
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ByMattSimpson
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AllRightsReserved

SUPPORT&RESISTANCE


ThankyoufordownloadingthisTradingGuide.Thisisthesecondofa4partseriestointroduceyoutoTechnical
Analysis.Eachparthasavideoandaccompanyingtradingguidewhichyoucanviewbelow.
Part1:Trends
Part2:Support&Resistance
Part3:ChartPatterns
Part4:TATechniquesCombined
Part5: TradingTechnically(BonusVideo)

SUPPORT&RESISTANCEEXPLAINED:
Atanyonetimeatraderhasonly3options
Buy(buylong)
Sell(sellshort)
Standaside
Letustakeascenarioofthebullspushingpricesuptoalevelthathaspreviouslybeenaresistancelevel.
Bullssuccessfullyoverpowerbeartopushupprices
Pricereachesalevelthat,forwhateverreason,sawpricepreviouslyreverse
Asweapproachthislevelsomebullsdecidetocloethiertradesandbookaprofit
Atthesametimesomebearsseepriceapproachingthelevelanditlosesmomentum,sodecidetosellshort
Pricenowslowsfurther,andevenhaltsneartheresistancelevel
Someotherbearscomealonganddecidetojointheparty,soalsosellshort
PricebeginstodeclineawayfromtheresistancelevelTheresistancelevelhasbeenrespected
FurtherInTime:
Priceacceleratestowardstheresistancelevel
Somebears,whopreviouslyprofitedfromgoingshortatthislevel,sellshortagain
Howeverinthisinstancetherearemorebullsthanbears,sopricebreaksthoughtheresistance
Oncepasttheresistancelevelpricetriggersthebearsstops,forcigpriceevenhigherstill
Somebullstakeprofitwhilstsomebearsalsodecidetogoshortpriceretracestowardspriorresistance
Feelingmoreconfidentthebullsbuymoreatthepreviousresistancelevelandpriceslows,thengoesup
Ourpreviousresistancelevelhasnowbecomeasupportlevel
NowweunderstandwhatcausesSupportandresistance(S/R)wecannowformthefollowingassumptions
- Supportbecomesresistanceandresistancebecomessupport
- ThelongeranS/Rlevelholdsthemoresignificantitbecomes
- ThemoretimeanS/Rlevelholdsthemorereliableitisdeemedtobe
- WhenasignificantS/Rlevelbreaksthemoresignificantasubsequentmovecanbeexpected

SUPPORT&RESISTANCE


Support&ResistanceInterchange
SupportandResistanceinterchange:
Oncealevelofresistancehasbeenbrokentotheupsideyouwilloftenseethissamelevelretested.Ifthisholdsthe
previousresistanceisthenconsideredtobealevelofsupport.Thereverseisalsotruewhenalevelofsupport
breaksitoftenbecomesalevelofresistance.
ThelongeranS/Rlevelholdsthemoresignificantitbecomes
LevelsofS/Rcanlastanythingbetweenacoupleofminutes,toyearsordecades.
ThereasonforthebreakdoesnotusuallyconcerntheTechnicalAnalystbecauseweassumesomethingspecialhas
changedwithinthemarketconditionsforthisleveltobreak.

SUPPORT&RESISTANCE


MEDTHODSTOIDENTIFYS/R:
WhilsttherearemanyinventivewaysoffindingS/RlevelsIamgoing
tocoversomeofthesimplestandmostfrequentlyused.Theseare
themethodsIusemyselfandareapplicabletoeverytimeframeor
market,andaccessibletoanyonewithchartingsoftware.
TheideaistocombineseveralformsofS/Rtogainmoreconfidence
inaparticularlevelholdinginfuture.Themoreoftheselevelsyou
canidentifywithinarelativelycloserangetoeachother,thebetter.
Price
- HorizontalS/R
- Zones
- Trendlines/
Channels
Indicators
- PivotPoints
- Fibonacci
- Moving
Averages
HorizontalS/R

Thisisbyfarthemostsimpleofmethods,andtheoneIusemostoften.Ifyouhadtolearnonlyoneformofanalysis
thenIwouldrecommendHorizontalS/R.
Allwearelookingforareaareasonthechartwhichhavebeentestedmanytimes(themoretimesthemorereliable)
andideallyhavebeentestedasbothsupportandresistance.Iftheyhavebeentestedasbothsupportand
resistance,thenyouwillhearmerefertotheselevelsaspivotalS/Rlevels.
UsetheCrosshairtoidentifyhorizontalS/R:
PressControl+Dtoenablethecrosshaironyourchart,thenmoveyourmouseupanddownthechart(without
clicking)tofindareasthathavebeentestedandrespectedonthechart.Theselevelsneedntbeperfect(although
sometimestheyare)soitisOKiftheCandleTails/Wickestestthelevelsonceinawhile.Alwaysstartonhigher
timeframestoidentifymajorlevelsorS/Rbeforemovingtolowertimeframestorepeattheprocess.

SUPPORT&RESISTANCE


Zones

ZonesaresimilartoHorizontal(orPivotal)S/Rlevelsexcepttheyallowformuchmorebreathingroom.Sotheseare
notlevelswhereyouexpectanexactpricetogethitandreverse,butareaswhereyouexpectsomesortofpriceor
hesitation,ifnothingelse.
IregularlyusethreemethodstoidentifyZonesareasfollows:
- CongestionAreas
- Swingpoints
- LongTails/Wickes
TheseCongestionsAreasworkonalltimeframesanditissimplyacaseoflookingleftandnotingtheseareasas
potentialS/Rareasbeforepricereachesthere.
CongestionsAreas
IfyoulookattheSilverWeeklychartyoucanseehow
therewassomeverymessy/sidewayspriceaction
aroundMarch2010whichIhavehighlightedinGreen.
Pricethenralliedallthewayupto50.Some3yearslater
pricecameallthewaybackintothegreenboxandheld
assupport.Idrewtheboxlongbeforepriceevergot
there.Thisisnotanexactscienceandcertainlynosignal
tobuysilver,butithelpedusanticipateanareaof
supportlongbeforeitgotthere.

SwingPoints
- Swingpointsmustbeoneof,ifnotthemostclosely
watchedpointsonachart.
- AnyonewhousesDowTheory,ElliottWavesand
TrendsAnalysis(HigherHighs,LowerLowsetc.)
watchtheswingpointsonachartaspartoftheir
analysis.
- Theyneednotbeprecisebutyouusually(atthevery
least)getapricereactionwhenwerevisitaprevious
swingpoint

SUPPORT&RESISTANCE


LongWicks/Tails

Thisisbyfarthemostsimpleofmethods,andtheoneIusemostoften.Ifyouhadtolearnonlyoneformofanalysis
thenIwouldrecommendHorizontalS/R.
Allwearelookingforareaareasonthechartwhichhavebeentestedmanytimes(themoretimesthemorereliable)
andideallyhavebeentestedasbothsupportandresistance.Iftheyhavebeentestedasbothsupportand
resistance,thenyouwillhearmerefertotheselevelsaspivotalS/Rlevels.
Longtails/Wickes:
- Alsoreferredtoasspikes,longwickshighlightareasthathavebeenaggressivelyattackedyetsuccessfully
defended,makingitanimportantpricelevelforfuturereference.
- Usingaspikeinisolationisnotalwaysenough.
- IfweseemultipleareaswherethesespikesappearIwilldrawaboxconnectingtheseareastodrawmyzone.
- ThistechniqueisparticularlyusefulonFX(especiallyCrossesandExotics)asthesemultiplespikesareacommon
characteristicofthesemarkets.

SUPPORT&RESISTANCE


Channels/Trendlines

TrendlinesareinessenceS/Rlevelsandchannelissimply2paralleltrendlines.Ifindtherealpowerofusingthese
methodsarewhenyouidentifyalevelwhichcoincideswithanotherformofS/R(suchashorizontalorpivotalS/R).
IntheexampleonGBPUSDweeklywecanseethelowerChannel(ortrendline)coincidedwitha61.8%Fibonacci
retracement).WhenpricehitsthislevelitdidntlookbackWewillcoversuchconfluenceslateringreaterdetail.
Youcanalsoseechannelswithin
channels,howevertheysuffer
fromthesamedrawbackas
trendlinesquiteoftenbythe
timeyouhaveidentifiedthem
mostofthemoveisover.
Ausefulfeatureofchannelswithin
channelsistheycanproviderough
profitobjectiveswhenthey
overlap.HerewecanseeGoldand
pricereversedwhenitreachedthe
upperbandofeachchannel.
Alsonotehowthelowerinner
channelprovidedresistancewhen
goldretracedbacktothe
trendline.

SUPPORT&RESISTANCE


PivotPoints
PivotpointsareparticularlypopularwithForextraders.Youwilloftenhearreferencetointradaytradersusingthem
buttheycanalsobeusedonhighertimeframessuchasdailyorweeklycharts.Theyareoneofthefewpredictive
indicatorsavailableastheyuseyesterdaysdatatoprojecttomorrowsS/Rlevels.

DailyPivotPoints
Theyconsistofapivotlevelwiththree
resistance(R1,R2,R3)andthreesupport
levels(S1,S2,S3)whichuseyesterdaysclose,
highandlowpricesaspartoftheir
calculation.
Hereyoucanseehowpricehasrespectedthe
dailypivotpointandrallieduptoR1,butthen
continuedtothemidwaypointbetweenR1
andR2.
Thereisnowayofknowinginadvancewhich
oneswillgetrespectedbutmanytradersonly
focusontradingbetweenPivottoR1orPivot
toS1.

Whilstyoucanseereactionsattheselevelsandtheydoattimesappearpredictive,therearealsotimeswherethey
arecompletelyignoredandyouquestionwhyyouhavethemonyourcharts.Youwillseemanystrategiesusing
theselevels,butmypersonalexperiencehasledmetobelieveyoushouldnotusetheselevelsinisolation.
ForthisreasonItakemorenoticeofapivotleveliftheycoincidewithanotherlevelofS/Rsuchasamovingaverage,
pivotalS/Rorevenanotherpivot.ForexampleIfIseethatWeeklyR2andMonthlyR1areclosetoteachotherIwill
drawabox(likethezonesmentionedearlier)thendeletethepivotlevelstoclearupmycharts.
MonthlyandWeeklyPivotPoints
Theweeklyandmonthlypivotpointcalculationsare
thesameasthedaily,onlytheyusetheprevious
weeks(ormonth's)open,high,lowandclosepoints
asopposedtothepreviousdaysdata.Hereyoucan
seeatightzonebetweentheMonthlyS1andWeekly
E1Iwillpayalotmoreattentiontothislevelof
resistanceoveranysinglepivotlevel.
Additionallywecanseethereare2xHighWick
candleswhichtriedtobreakabovethepivotsbut
failed,sothisisa3
rd
reasonastowhythereis
weaknessnearthepivotlevels.

SUPPORT&RESISTANCE


Ionlyputpivotlevelsontomychartstemporarilytohighlightareaswherepivotsoverlaporareclosetoeachother.
OnceIhavemarkedtheseontothechartswithboxesIthenremovethemasIpreferaclearcharttotradefrom.
AlsoPivotpointsdonotcomesuppliedwithMT4asstandardbuttherearemanyversionsfreelyavailableonthe
internet.Ihavechosentheonesabovebecausetheyarecleanandsimpleandonlyshowthecurrentpivotlevels.
ManyofthePivotPointsyouwillcomeacrosswillshowhistoricallevels.Whilstthiscanbehandytoshowyouhow
wellamarkethasrespectedthem(ifatall)theycanmakethechartsverymessyandhardtoworkwith.
Whicheverpivotspointsyouchoosewillbedowntopersonalpreference.
Fibonacci
TherearetwoformsofFibonacci:RetracementsandExtensions.ForS/RlevelsIonlyuseretracementsothisguide
willonlycoverthismethod.
TheretracementtoolisquiteaptlynamedasthisisexactlywhatwearetryingtomeasureRetracements!
Whentrendisineffectandweseeasuspectedphase2move(alsoknownascorrections,countertrendor
retracements)wemeasurethedistanceofphase1totryandanticipatewherephase2mayend.
Howeverrememberthatthemarketsarefractalsoyoucanalsomeasuremuchlongertrends.Formore
informationonthefractalnatureoftrendspleaserefertoguide1Trends.
ForsimplicityIonlyuse38.2%,50%and62.8%retracementlevels,andtakemorenoticeiftheyoverlapwithother
FibsnumbersorformsofS/R.

SUPPORT&RESISTANCE


MovingAverages(MA)

WhilstwecoveredMA'sfortheuseoftrendsinPart1,theycanalsobeusedforS/Rlevels.Somethingtokeepin
mindhoweverthefactthatMAs,liketheirnameisimplies,Move!
Thereisnogoldenrulestatingwhichperiodsyoushoulduse,orwhichtype(Simple,exponentialetc.)butitismore
importantyouarefamiliarwiththecharacteristicsoftheMA'syouchoosetouse.AllMA'slagbehindpricesoIonly
placethemontoacharttemporarilytoseeiftheycoincidewithotherS/Rlevelsbeforeremovingthemtokeepmy
chartclear.
YouwillalsoseemanytextbooksorstrategiesreferringtopricebouncingoffofMA'sbutItreatthemliketrendlines
IwouldneverenteratradesimplybecausepricehastestedeitheratrendlineorMAasIfailedtotradelikethis
profitably.SolikeallofmyanalysisitneedsseveralconfluencesinthesameareabeforeIgiveitanyweight.
PersonallyIuseacombinationof8,21,50and200eMA(exponentialMA)butyouwoulddojustaswellusingthe
sMA(SimpleMA).The50and200areverypopularsoarecloselywatchedbyalotofmarketparticipants,soit
makessensetousetheseastheytendtogetreactionsandactas'dynamicS/R'levels.Howeverthe8and21eMAI
don'treallyuseforS/Ratallbutinsteadvisualisetheareabetweenthe2asacloudandlookforbuyorsellsetups
aroundtheseareas.
Pricehasstalledatthe200eMA
afteraparticularlybullishrun
up.
Alsonotehowthislevelheldas
resistanceandwasalso
previouslysupport.
ThelongertheperiodofMA,
themorereliabletheytendto
beasS/R,particularlyonhigher
timeframesabovetheDaily.
Asforintradaytimeframes:
- The200MAonH4isvery
similartothe50MAonthe
daily
- The200MAonH1isvery
similartothe50MRonH4
Herewecanseehowpriceseemsto
'dance'aroundthe50and200
interchangeably.WhilstIconsiderittobe
dynamicS/Randiseasytoidentifyin
hindsight,tyingtotradeoffoftheselevels
areproblematicbecausethereissomuch
noisearoundtheMAitself.
IthereforonlyuseMA'sasanadditional
confluenceofS/Ralongsideotherformsof
S/R.

SUPPORT&RESISTANCE


UsingConfluencesofS/R

YouprobablynoticedmyrepeatedreferencestousingconfluencesI
cannotstressthisenough.Asatraderitisyourdutytotradehigh
probabilitytradesadawayofincreasingtheprobabilityofalevel
holdingisifseveralformsofS/R(oranalysis)allsuggestthesame
areas.
BelowyoucanseemypreferredmethodsofS/R.Ineedataminimum
of2frommypreferredlist,butmostoftenIuseallthree.Ionlytake
noticeoftheadditionalconfluencesifoneofmypreferredmethods
alsohighlightsanarea(soIneverusetheadditionalinisolation).

Mypreferred
Combination
- HorizontalS/R
- PivotPoints
- Fibonacci(50%,
38.2%)

Additional
Confluences
- Moving
Averages
- Channels
- Internal
Trendlines
OnceIhaveidentifiedmyconfluencesIthendrawboxesonthechartandremovemyindicators.Thiskeepsmy
tradingchartscleanandsimplewhilstalsohighlightingkeyareasIneedtolookoutfor.
Confluences:Trendline&HorizontalS/R

AspikelowconfirmedthepivotalS/RlevelwhichalsocoincidedwiththelowerChanneltrendline.Ihavefound
horizontalS/Randtrendlinestobequitereliable.

SUPPORT&RESISTANCE


Confluences:Fibonacci;HorizontalS/R;MovingAverages

HerewecanseehowUSDJPYiscoilingupinatriangularpattern.Whilsttheseareusuallycontinuationpatterns
(whichwouldsuggestaresumptionoftheuptrend)thereisnowlawsayingtheyhaveto.
Wearetradingjustabove97.00pivotalS/RandIwanttoknowwherethenextlevelofsupportisontheweekly
chartshould97.00break,andnotedthefollowingconfluencesat93.56
93.56isakeylevelofsupportbecause:
PivotalS/R
38.2%Retracement
50eMA
Butwhatif93.56breakstothedownside?
90.34because:
PivotalS/R
50%Retracement
200eMA
Iparticularlylikethese2levelsbecauseitisnotoftenyousee3confluencesofsupportorresistancewithinsuch
tightranges.

SUPPORT&RESISTANCE


Confluences:TrendlineResistance;200eMA;PotentialChartPattern
BetweenJuly10
th
and22
nd
AUDUSDhadbeencreepingupatrendlineandbrokedowntothepivotalS/Rlevelof
0.9130.WhenpricereboundedandmadeabullishrunIextendedthebrokentrendlineandwatchpricerespectthis
asanewlevelofresistance.
AdditionallyInotedhowthe200eMAwasinthesameareathensawaBearishCandlestickpatternformbeneaththe
resistanceconfluence.
AtthetimeIwasnotsureifitwasaHeady&Shoulderstop,butIcouldforeseethepotentialforthepatterntoform
iftheresistancelevelheld(whichisdid).
Whenpricestartedtodeclineitstalledtemporarilyat0.92225nearthePivotalS/Rand50eMA.Whenthislevel
brokepriceusedthe50eMAasresistancebeforerollingover.Thefactthat0.91300wasbrokenimmediatelyalso
confirmedhowbearishthismovewas.

SUPPORT&RESISTANCE


Confluences:Fibonacci;PivotalS/R;RejectionSpikes
WTIOilhadrecentlybrokenaboveadescendingtrendlinebutfoundresistanceatthe110level.Sincehitting
resistancepricethentradedsidewaysbetween102.30and110.The102.30levelwasimportanttomeforthe
followingreasons:
- 38.2%retracementlevel
- PivotalS/R
- Brokenresistance(trendline)nowbeingtestedassupport
- 2xRejectionspikesofthislevel
Therejectionspikesprovidedextraconfidenceasithighlightedhowthebearshadfailedontwoattemptstobreak
thislevel.
Intheeven102.30breaksthe100isthenextlevelofsupportforthefollowingreasons:
- 50%retracement
- PivotalS/R

SUPPORT&RESISTANCE


SUMMARY:
TherereallyisnothingmagicalaboutsupportorresistanceIseethempurelyasalogicalwayofbreakingdown
pricetoaidyourtradingplans.ThereareonlytwooutcomestothebehaviorofanS/Rlevelitwilleitherbe
respected,oritwillbebroken.IfrespectedgotoplanA,ifitbreaksgotoplanB.
Oncecombinedwithtrendlinesyouhaveamorecoherentviewofthemarket,whichwillallowyoutotimeyour
entries,exits,orknowwhentokeepoutofthemarketsalltogether.
Hereisanexampleofasimpleplan:
Ifalevelofsupportholds,wecanlookforbullishtradesinthesamedirectionofabullishtrendforahigher
probabilitytrade.
Iftherearemultiplelevelsofsupportinthesameareaitprovidesuswithgreaterconfidencethislevelmayhold.
Wecanconsiderplacingourstopbehindthislevelofsupport.
Wecanconsiderplacingourtakeprofitnearthenextlevelofresistance.
Ifthislevelofsupportbreakswewillgetstoppedout.
Ifthislevelissignificantwecanexpectalargerdownsidemovement,andcreateanewtradeplan.
- Supportbecomesresistanceandresistancebecomessupport
- Thelongeralevelholdsthemoresignificantitisconsideredtobe
- Ifasignificantlevelbreaksasignificantsubsequentmovecanbeexpected
- UseconfluencesofS/Rtoincreasetheprobabilityofitbeingrespected\
- S/Rlevelscanbeusedtoplanentryandexit(SL,TP)
IdentifyS/Rusing:
- HorizontalS/R
- Zones(Spikes,SwingPoints,CongestionAreas)
- Trendlines/Channels
- PivotPoints
- Fibonacci
- MovingAverages
ForGreaterConfidence
- Zoomoutforbiggerpicture
- IdentifyS/Ronhighertimeframesthenworkyourwaydowntosmallertimeframesyoutrade.
- UseconfluencesofS/R
- Combinewithotheranalysis
- Allowbreathingroom

SUPPORT&RESISTANCE


REDUCEYOURLEARNINGCURVE:
Ihopeyouhaveenjoyedthisseriesandfounditofbenefit.WhilstIwouldliketothinkyouarenowexpertanalysts
justfromreadingthisseries,likeanythinginlife,itwilltaketimetomasterwhichwillrequirepracticeand
experimentationhoweveragreatwayofspeedinguptheprocessistowatchothersperformanalysis.
TradersCorner FaceBook Twitter RSS
IwouldhighlyencourageyoutosubscribetotheThinkForexYouTubechannelandattendourweeklywebinarsas
theyincludedthemethodsusedthroughouttheseries.

Delgado - Forex: Technical Analysis The Support and Resistance.

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