Support and Resistance

One of the method of determining support and resistance levels is to look at a Candlesticks chart and its past price history and then see at what price levels the highs, lows and closes seem to be touching the most. This method of determining support and resistance levels works on any bar chart timeframe--hourly, daily, weekly or monthly. Many times a bunch of highs or lows will be concentrated in a small price area, but not at one specific price. If that's the case, determine that area to be a support or resistance "zone."

Major price tops and bottoms in markets are also major resistance and support levels. Unfilled price gaps (windows) on charts also qualify as very good support and resistance levels. Trendline support and resistance is also very useful. Projecting these trendlines to determine future support and resistance areas is extremely effective.

It's important to note that when a key support level or zone is penetrated on the downside, that level or zone will likely become key resistance. Likewise, a key resistance level or zone that is penetrated on the upside will then likely become a key support level or zone.

Another way to discover support or resistance areas is by looking at "retracements" of a significant price move--price moves that are counter to an existing price trend. These moves are also called "corrections." For example, let's say a market is in a solid uptrend. That uptrend began at the 100 price level and prices rallied to 200. But then prices backed off to 150, only to then turn around and continue to rally higher. This would be considered a 50% retracement of the move from 100 to 200. The 150 level proved to be solid support. In other words, the 50% retracement level proved to be a solid support level because prices dropped by 50% and then moved back higher. The same holds true for downtrends and "corrections" to the upside.

There are a few retracement percentages that work well at determining support and resistance levels. They are as follows: 33%, 50% and 67%. There are also two other numbers called Fibonacci numbers. Those numbers are 38% and 62%. So, these five numbers are the best at determining retracement support and resistance levels.

Finally, support and resistance levels for markets can be determined by "psychological" price levels. These are usually round numbers that are very significant in a market.

There are other methods traders use to determine support and resistance levels, but those mentioned above are few of the most popular.