How to calculate support and resistance

Support and resistance" is common jargon for areas on the chart where price has a difficult time breaking through. Support levels tend to stop price from falling below a specific point and resistance levels act like a price ceiling that price cannot break above. Knowing where these levels are make it much easier to decide when to open and close trades, but how can we locate these prices to begin with

Support and resistance doesn't have to be confusing. We can mix and match any of the methods above and create a healthy amount of price levels that we can trade. As always, practice makes perfect. So make sure to test out these methods yourself on a Real-time FXCM Demo using their award winning charting package.

Humans think in ‘round’ figures and so do traders; price action can exhibit this phenomena.

This is support and resistance; and after a currency pair goes on a prolonged trend, it eventually reaches a point where no new buyers want to buy, and sellers begin to look at the new, higher prices as an opportunity to realize some of their floating profits. This is where a top develops, and this is where price action denominates market dynamics.

If I were to ask you how much you paid for your car, or your house, or even that pair of shoes that you were wearing; odds are that you’d give me a rounded figure in response.

Something like ‘around 30k,’ is a much more common response to such a query than ‘$29,264.26.’

And the reason is that, as a human being, we value simplicity. And the odds are that if I’m asking that question, I don’t care about the ‘264.26.’ Likely, I just wanted a ‘ballpark figure’ in response to get a general idea. ‘About 29,000’ or ‘around 30k’ would both be acceptable answers that would provide the information I was seeking in a more simplistic format.

This becomes relevant because traders are human, and just like human beings do in other facets of life; traders attempt to simplify by rounding to the nearest, rounded whole number.

Support resistance indicator

The great part about support and resistance indicators is that they are flexible and they can be developed into your trading method, so that you are comfortable with them. As we all know, we need to trust our trading system. The available methods to

Psychological Levels
Often called "psych" levels, psychological levels occur when price ends with multiple 0's. It's human nature to gravitate towards round numbers when discussing any topic that involves numbers, Forex included.
For example, when traders talk about what they think the Euro will be worth in the future, they probably won't give an answer of 1.4278 or 1.3044. They are much more likely to round off the price to something simpler, like 1.4300 or 1.3000. The same thing happens when Forex traders place their orders. We will often see clusters of orders around these whole numbers, which creates price levels that can affect how price behaves. That's exactly what we want for our support and resistance levels.
The most common psych levels involve price having two zeros at the end (not including the 1/10th of a pip), such as 1.6400 or 102.00. More powerful than that would be psych levels ending in three zeros, such as 1.3000 or 120.00. Leaving the most powerful psych levels of all, four zeros at the end, 1.0000 or 100.00. The chart below has four levels drawn at psychological levels. We can clearly see their effect on price action.

Swing Highs & Lows
Another great way to find support and resistance levels is to mark levels in the past where price had a difficult time breaking through. As price moves up and down, each level that price has bounced off of could be a level in the future that price bounces off of again. This is a manually intensive method and takes time to draw on all the currency pairs that we trade, but can pay off in the long run.

As the EUR/USD chart shows above, a level was drawn when price reached a new high or low (red circle). Later when price approached these levels again, they bounced off the same levels (white circles). The effect will not always be this clean, but it does occur fairly often. This is a method used quite often in Range Trading. We can buy at support with our stop loss below and we can sell at resistance with our stop loss above.

Pivot Points

Arguably the easiest support and resistance levels to add to our charts, pivot points are a built-in indicator on FXCM platforms that will automatically draw key levels without any effort on our part at all. Pivot points are created by the previous period's High, Low and Close prices, with the most common period size being the Daily period. We can use these levels just like any other potential support and resistance levels on our charts.

Support and resistance levels & support and resistance lines

The ‘Major’ Levels
When a currency pair like EURUSD approaches a level like 1.4000, or 1.3000, or even 1.2500 for the first time in a year, this has a tendency to garner attention.
Let’s say that EURUSD has just eclipsed 1.3000 for the first time in a year, and you decided you wanted to buy once price hits 1.3104. But if EURUSD breaks back below 1.3000, you no longer want to be long; so you place your stop loss right at a value of 1.3000.
After all, if EURUSD was trading at 1.2900 at the end of the US session on Monday, and opens the US session on Tuesday at 1.3104, this catches attention. It’s glaringly obvious.
Will this spark a reversal?
Unfortunately that’s unpredictable at-that-point, as there isn’t enough information to determine whether prices will reverse simply because a particular level was hit. But at the very least, it could cause trends to stall as the market attempts to digest these new prices.

These are the major levels and they take place in 500-pip increments in the major currency pairs. In the chart below, we’ve identified the most recent ‘major’ psychological levels that have been ‘in-play’ on the EURUSD weekly chart. The levels identified are 1.2000, 1.2500, 1.3000, 1.3500, 1.4000, 1.4500, 1.5000, 1.5500, and 1.6000.

So the ‘Major’ levels will catch quite a bit of interest, and can potentially increase the probability of a trend stalling or reversing, but we can take this study a step further.
The 100-pip increments between these levels are also considered ‘Major’ psychological levels, albeit not quite ‘as major’ as the 500 pip increments we looked at before. These prices are less-round, but they still come up quite often as support or resistance in markets.
In the Daily chart below, we’ve identified these levels on GBPUSD using even, 100-pip increments. We’ve also highlighted numerous reversals or swings that took place with yellow circles.

The Minor Levels
If traders could sit back and wait for reversals anytime a new major level comes into-play life (and trading) would be just too easy.
Within each 100-pip interval are 3 additional levels that are considered to be ‘minor’ psychological support and resistance values. These levels are in 25-pip increments, and in the chart below we’ve moved into the hourly GBPUSD setup to look at the ‘minor psych’ levels in the pair.
In the chart below, we’ve identified the levels of 1.6775, 1.6800, 1.6825, 1.6850, 1.6875, 1.6900, 1.6925, 1.6950, 1.6975, and 1.7000.

Notice how we’re able to see more reversals now that we’ve integrated the ‘minor’ psychological levels. And while these levels may not be as consistent as the ‘Major’ or ‘Less Major’ psych-levels, they can still present considerable opportunity to the trader.