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Support & Resistance – Overview
The Support & Resistance Indicator is designed to assist traders in their daily trading activities. It automatically identifies and marks levels of price interaction on MT4 and MT5 charts, displaying them as rectangular areas.
Key Features
- Automatic Detection: The indicator spots the price levels that have seen significant interaction in the past.
- Price Range: The height of support or resistance areas adjusts based on the difference between recent price highs and lows.
- Color Coding:
- Resistance Levels: Marked in orange.
- Support Levels: Marked in blue.
- Non-Repainting: The indicator does not alter previous levels, though new highs or lows can adjust the height of existing levels.
Optimal Timeframes
The best timeframes for using this indicator are M15-H1. This range allows for effective analysis and trading opportunities based on the identified support and resistance levels.
How the Indicator Spots Levels
The Support & Resistance Indicator employs various methods to identify key levels on price charts. Unlike the Pivot Points indicator, which uses historical candlestick data, this indicator focuses on levels with the maximum number of price “touches.”
Touch Concept
Subjectivity: The concept of a “touch” can vary based on individual interpretation. To enhance accuracy, the indicator utilizes a publicly available Fractal Indicator to identify these touches, which represent extreme price levels.
Timeframe Independence
The formula used by the Fractal indicator is effective across all timeframes, allowing the Support & Resistance Indicator to function effectively on any timeframe.
Level Identification Process
Once touches are identified, the indicator’s algorithm determines which levels have the most significant price interactions and displays them on the chart.
Interaction Visualization
Users can click the weight number next to a rectangle to see specific price interactions with that level. Note that some interactions may appear outside the filled rectangle; this is by design, as these touches contribute to a more precise level identification.
Area Coverage
The identified support and resistance levels occupy just under 50% of the area analyzed by the algorithm, ensuring that only significant levels are highlighted.
For Whom is the Support & Resistance Indicator Suitable?
Support and resistance are crucial price reference levels that assist traders in making informed Forex trades. The S&R Indicator is compatible with any other indicator or trading system.
Suitable Users
- Novice Traders:
- While it’s essential to learn how to draw support and resistance levels manually, the S&R Indicator serves as a helpful tool for those still developing their skills.
- Experienced Traders:
- The indicator is valuable for seasoned traders as it saves time on identifying and drawing these critical levels.
Trading with the Support & Resistance Indicator
There are three major techniques for trading using strong support and resistance levels:
- Rebound (Bounce) from a Level: Enter trades when the price retraces to a support or resistance level.
- Level Breakout: Trade when the price breaks through a identified support or resistance level.
- Retest of the Broken Level: Enter trades after the price breaks a level and then tests it as a new level.
What is Fibonacci Retracement?
Fibonacci retracement is a technical analysis method based on the Fibonacci sequence. This sequence starts with 0 and 1, forming a series like this:
0, 1, 1, 2, 3, 5, 8, 13, …
By dividing certain Fibonacci numbers, traders derive key ratios used for retracement levels:
- 23.6%
- 38.2%
- 50%
- 61.8%
- 76.4%
These ratios are critical in predicting potential price retracement levels after a significant market movement.
How the Auto Fibonacci Retracement Indicator Works
1. Automatic Plotting
The Auto Fibonacci Retracement Indicator automatically identifies the highest and lowest points on a price chart, eliminating manual plotting and reducing errors.
2. Retracement Levels
The indicator plots Fibonacci levels between 0% and 100%:
- Bearish Markets: Zero is at the top; 100% at the bottom.
- Bullish Markets: Zero is at the bottom; 100% at the top.
3. Market Behavior
After reaching a new high, markets typically retrace to Fibonacci levels before continuing in the trend’s direction.
For example, in an uptrend, if a retracement is expected at the 38.2% level, traders can wait for the price to pull back before entering a buy position.
Trading Strategy with Auto Fibonacci Retracement
1. Entering a Trade
Buy Position:
- Wait for the price to retrace to a key Fibonacci level (e.g., 38.2%).
- Place a buy order once this level is reached.
Sell Position:
- In a downtrend, wait for price to rise to Fibonacci retracement levels (e.g., 61.8%).
- Enter a sell order when the price reaches this level.
2. Setting Stop Loss and Take Profit
Stop Loss:
- For buy orders, set the stop loss below the recent swing low or below the 50% level.
- For sell orders, set it above the recent swing high.
Take Profit:
- Consider taking profit at the next significant resistance level or at Fibonacci levels like 61.8% for buys and 78.6% for sells.
3. Utilizing Multiple Fibonacci Levels
The 50% and 61.8% levels are favored due to their significance. The 78.6% level often indicates strong reversal points and should not be overlooked.
4. Combining with Other Tools
It is advisable to use the indicator alongside other technical indicators (e.g., moving averages, MACD) for better decision-making.
Chart Example
Consider the price action of the U.S. dollar against the Japanese Yen in a 30-minute time frame:
- After a bullish run, the price retraces beyond the 38.2% and 50% levels.
- A notable bounce occurs at the 61.8% level, with a pullback to 38.6% before continuing the bullish trend.
Downtrend Strategy:
- Enter short positions with stop loss above recent swing highs.
- Ideal exit points can be set at the 78.6% level or the 100% Fibonacci level, aligning with support zones.
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