3 Support And Resistance Indicators That Work (And How to Trade Using Them)
3 Support And Resistance Indicators That Work (And How to Trade Using Them)
Looking for the best support and resistance indicators?
While there are many indicators out there that can help you identify support and resistance levels…
Not all of them work.
If you use the wrong support and resistance indicators, you will identify wrong support and resistance levels.
And if you use those wrong support and resistance levels in your trading…
Then chances are you’re going to be unprofitable in the long run.
So how do you exactly identify support and resistance levels?
And which indicators should you to accurately identify these levels?
In this post, I’ll share with you how I identify support and resistance levels…
But more importantly, I’ll show you how to use them to get into a trade.
So before getting into the indicators, you need to first know…
What is Support & Resistance
So what exactly is support and resistance?
Many people think that support is when there are more buyers than sellers…
And resistance is when there are more sellers than buyers.
However, that’s not exactly true.
Because most of the time, one buyer can go against ten sellers and still cause the market to go up…
And one seller can go against ten buyers and still cause the market to go down.
That’s because if that one buyer or seller has an order of 1 million lots, but the combined orders of those ten buyers or sellers are less than 1 million lots…
Then the market will be moved in the direction of that one buyer or seller.
So it’s not the number of buyers or sellers that move the market.
It’s the size of the buying and selling orders that move the market.
So support is where there is more buying than selling…
And resistance is where there is more selling than buying.
In general, think of support as a floor and resistance as a ceiling.
If you throw ball unto the floor, it will bounce back up.
And if you throw a ball against the ceiling, it will bounce back down.
Why Identify Support & Resistance
I’m sure that you’ve heard of the importance of identifying support and resistance areas on your chart.
But why do that?
That’s because those are possible turning points in the market and can help you with your trading decisions.
For example, if you’re flat and the market is reaching near a key support level, that could be a possible place to go Long.
And if you’re in a Short trade, then you might want to close your trade just before reaching the key support level or at least close part of your position before the key support level.
So when you’re able to accurately identify support and resistance levels when you’re trading…
It will allow you to get into high probability trades, as well as help you determine where to take profit on your trades.
Now, although we know that identifying support and resistance levels are important, many traders identify them wrongly.
So how do you identify support and resistance levels accurately?
Here are 3 support and resistance indicators that plain works and will help you identify these levels more easily.
1) Swing Highs & Swing Lows
The first support and resistance indicators are swing highs and swing lows.
Swing highs and swing lows are turning points in the market.
These are areas that the market has already indicated there is more buying or selling pressure causing the market to turn.
So if the market were to revisit these areas again, there is always a chance that it could turn at those areas again.
In the chart above, you can see that as the market got close to the swing high and swing low, it started to turn.
However, we do not want to just place a buy order at every swing low or place a sell order at every swing high.
We want to wait for the market to show us signs that it is potentially a strong support or resistance level before entering into a trade.
How to Trade Swing Lows As A Support Level
If the market is approaching a swing low, wait for the market to first break below the swing low.
Once it has broken the swing low, wait for the market to form a bullish candlestick pattern.
There are 3 main bullish candlestick patterns that I like to look out for:
- Bullish Pin Bar
- Bullish Piercing Pattern
- Bullish Engulfing Pattern
What we want to look for is for either of these bullish candlestick patterns to close above the swing low level.
If it closes above the swing low level, either go Long at the market or wait for the market to close above the bullish candlestick pattern to go Long.
Let’s take a look at an example:
On the left-hand side of the chart above, you can see that there is a previous swing low at around 1.1179.
The market then formed a Lower Low which broke the low of the previous swing low.
It then formed a Bullish Engulfing Pattern and closed above the previous swing low level.
This is an indication that the support level at the previous swing low is holding up, and is a valid trade setup.
Either go Long at the close of the Bullish Engulfing Pattern or go Long at the close above it on the next bar.
How to Trade Swing Highs As A Resistance Level
Trading a swing high as a resistance level is simply the opposite of trading a swing low.
If the market is approaching a swing high, wait for the market to first break above the swing high.
Once it has broken above the swing high, wait for the market to form a bearish candlestick pattern.
There are 3 main bullish candlestick patterns that I like to look out for:
- Bearish Pin Bar
- Dark Cloud Cover
- Bearish Engulfing Pattern
What we want to look for is for either of these bearish candlestick patterns to close below the swing high level.
If it closes below the swing high level, either go Short at the market or wait for the market to close below the bearish candlestick pattern to go Short.
Let’s take a look at an example:
On the right-hand side of the chart above, you can see that the market has formed a swing high around 79.90.
There was a big spike to 79.90 and then the market got pushed back down.
This is a sign that there is strong selling pressure at that level.
After that, the market started to gradually trade back up to that level.
It then formed a Higher High that broke above the previous swing high and formed a Bearish Pin Bar.
This Bearish Pin Bar then closed below the previous swing high.
To go Short, either go Short at the close of the Bearish Pin Bar or wait for the market to close below it to go Short (which is the next bar).
2) Exponential Moving Averages
The next support and resistance indicator are Exponential Moving Averages (EMA).
However, unlike swing highs and swing lows, EMAs are dynamic support and resistance levels.
That means that it is not based upon a fixed level like swing highs and swing lows are.
Instead, the support and resistance levels are based upon the EMAs.
If you take a look at this chart below, you will see that the market has bounced off the EMAs several times.
In the chart above, I’ve used the 20 EMA and 50 EMA.
The market has found support several times on both the EMAs.
This is what I mean by dynamic support.
However, there are also many times where the market ignores the EMAs and just goes through them.
You can see in the chart above that the market pretty much ignored both EMAs and go through them as though they aren’t there.
Hence it’s important to not assume that the EMAs will always serve as dynamic support and resistance levels.
How to Trade the EMAs As A Dynamic Support/Resistance Level
So here’s how we get into a Long trade using the EMAs as dynamic support (Shorts are reversed):
First, wait for the 20 EMA to cross above the 50 EMA.
Then wait for the market to trade down to either of the EMAs.
Look for a bullish candlestick pattern to form on either of the EMAs.
Similar to the swing high and swing low trade examples, we’re looking for:
- Bullish Pin Bar
- Bullish Piercing Pattern
- Bullish Engulfing Pattern
Once the bullish candlestick pattern has been formed…
Go Long at the close of the bullish candlestick pattern or the close above it.
Let’s look at an example:
In the chart above, you can see that the 20 EMA just crossed over the 50 EMA.
Then the market started to make a pullback to the EMAs.
As it touched the 50 EMA, it formed a Bullish Engulfing Pattern.
That is the trigger to go Long.
If you missed that entry, the market did another bounce off the 50 EMA moments later and formed a Bullish Pin Bar.
That would be another valid entry signal.
After that, you can see the market started to go up and also found support on the 20 EMA several times.
3) Depth of Market
The third support and resistance indicator is to see the Depth of Market (DOM).
This is more relevant for people who trade stocks or futures because they are able to see the DOM.
For Forex, this isn’t applicable because the DOM we see isn’t a true reflection of the orders in the market because it’s not a centralized exchange.
Back when I was a prop trader, I heavily relied on seeing the order flow on the DOM to see where buyers or sellers were coming in to push the market.
These buyers and sellers can form the support and resistance levels because they can move the market.
Take a look at the DOM below:
Can you see at which price level there might be a possible resistance?
The answer is at 126’310 and 126’315.
And the reason is that the volume traded at those two price levels were much higher than the other levels.
That means that the buyers had a hard time trying to push the market up.
So chances are when the market trades up to that level again, there will be selling pressure coming in to defend that price level.
Hence that is a possible resistance level.
How to Trade Support & Resistance Using the DOM
Step 1: Identify that the market has started to trend in one direction with strong buying or selling pressure in the direction of the trend.
For example, if the market is in an uptrend, you want to see some strong buying with the Offer giving way relatively easily.
Step 2: Identify potential levels to enter a trade.
Ideally, you want levels where the market profile shows a relatively large volume because there’s a high chance that the market will turn at those levels.
Step 3: Wait for the market to make a pullback and wait for the Order Flow to confirm an entry.
For example, if you’re planning to go Long, you want to look out for absorption on the Bid or a slowing of selling pressure.
Step 4: Once the Order Flow conforms with the direction of your trade setup, then you enter the trade.
So for example, if you want to go Long and you see strength on the Bid, you can either queue on the Inside Bid, or lift the Offer to go Long.
Let’s take a look at an example:
On the left-hand side of the image above, you can see that the market is trending up.
Based on the market profile you can see that 105 and 100 are two potential entry levels…
Because it shows there was high volume traded there.
So what you want to do is wait for the market to make a pullback to these two price levels.
In the DOM above, you can see that it is now 105 Bid / 110 Offer.
However, you don’t want to enter into a trade yet.
Instead, you want to wait for the Order Flow to confirm that 105 would be a good place to go Long.
To go Long, you want to look for either strength on the Bid…
Or weakness in selling into the Bid as the market got to 105 or 110.
In the DOM above, you can see that 105 has started to get hit and there were 581 lots transacted on the Bid.
At this point, although 105 Bid was much smaller than the 110 Offer, it did not turn Offer.
That was a sign that there wasn’t a huge seller coming in to push the market lower.
Also if you noticed, the Bids below 105 are pretty thick.
This is an additional clue that the market might be holding at those levels.
Shortly after, 105 became Offer but the size was small.
At this point, 100 Bid did not get hit at all.
There was also a pause at 100 Bid and 105 Offer.
Then after the short pause, someone lifted the Offer at 105 for 66 lots.
This is the sign to go Long and I lifted the Offer at 105.
A few moments later, a huge buyer came and swept the whole Offer at 110 and it immediately became a huge Bid.
More often than not, when a level gets swept, it indicates a huge buyer or seller who wants to push the market.
And since I’m Long, this gave me the conviction to hold the trade a little longer.
When you’re Long or Short, you want to see big buying or selling coming in to sweep the levels in the direction of your trade.
If you’re spot on in your Order Flow read, the market generally shouldn’t go against you by more than 2 – 3 ticks.
Conclusion
While there are many different support and resistance indicators available on different trading platforms, you don’t need to use all of them.
In fact, the ones that I’ve shown you in this post is more than enough.
And if you noticed, the indicators that I’ve shown you in this post that identifies support and resistance levels are based on price action.
That’s the purest form of identifying support and resistance levels.
Support and resistance are not defined by indicators, but rather by the buying and selling taking place in the market.
Hence, what I’ve shown you in this post works because it is based on identifying past buying and selling activity.
Remember, when you trade support and resistance levels, don’t anticipate the trade in advance.
Rather, wait for the market to first bounce off them to confirm that the support and resistance levels are likely to hold.
And when you do that, you will have a higher probability of having your trade work out.
One more thing…
Did you like this post?
If so, would you please share it?
Remember, sharing is caring, and it won’t even take 5 seconds of your time.
So go ahead, click the share button below now 
Wow this is a really great post!
Glad you liked it.
Thanks for this great post Davis, I learned a lot!
Glad you liked it.
Thanks a lot!
You’re welcome!
I’m finding your blogs so useful. One question though, forex being decentralized, how can forex trader get their hands on reliable depth of market? Thank you.
Hi, you can’t really get “reliable” depth of market in forex because as you mentioned it is decentralized. Each broker will show their own depth of market from their pool of clients.
The other alternative would be to trade currency futures. From there you would have the depth of market from the futures exchange.
Nice article!