If you’ve ever seen a market trending higher before suddenly stopping and reversing or consolidating at a certain price, you may have wondered, why did the market plateau at that price? Chances are that traders with a significant number of pending sell orders were waiting for that price level to be hit. Then, those sell orders stopped the trend dead in its tracks.
There are several popular indicators and concepts futures traders use to identify key support and resistance levels throughout the trading session. Support and resistance levels can be vital for helping traders determine entry and exit points. Let's look at some of the most common intraday support and resistance level indicators.
Three Basic Principles of Support and Resistance
The three basic principles of support and resistance include:
- Role reversal - when a price level that previously acted as support is broken through to the downside, it can then transform into a new resistance level, and vice versa.
- Testing - support and resistance levels are often tested multiple times before either holding firm or before the price breaks through.
- Retracement - often when the price breaks through a key support or resistance level it will pull back to that same level one or more times before the start of a new extended trend.
How to Determine Support and Resistance Levels Using Prior Day Open/High/Low/Close
The three most important points of any daily bar is the high, the low, and the close.
- The high: represents where buyers could no longer overcome selling pressure.
- The low: represents where sellers could no longer overcome buyers.
- The closing price: where the buyers and sellers settle on a price at the end of the trading day.
These levels can often act as strong support and resistance levels for the next day’s trading intraday. The Prior Day OHLC indicator marks these important daily levels on an intraday chart. (See Figure 1)
How to Determine Support and Resistance Levels Using Pivot Points
Often called Floor Trader Pivots, this study relies on the previous day's trading range and average closing price to determine important trading levels. Pivot points are seven distinct support and resistance levels that are calculated using the previous day's high, low, and close levels. These help plot for the current intraday session.
How to calculate the Pivot Point
The pivot point, which is the middle level, is calculated by finding the average of yesterday's high, low, and close. The three levels above the pivot are labeled R1, R2, and R3, where R stands for resistance. The three support levels beneath the pivot level are labeled S1, S2, and S3, where S stands for support. The S- and R- levels are determined by the previous day’s range from the center pivot level.
These pivot values can act as support or resistance levels depending on where the price is trading. The pivot study originated before electronic trading, and traders on the trading floor would use the previous high, low, and close to calculate the next day's pivot levels. These pre-calculated pivot levels were used as targets and stops for the next trading session.
On days where news or economic reports move the markets, it is not uncommon to see price trend through one or more pivot levels, before consolidating at an extreme pivot level. (See Figure 2)
How to Determine Support and Resistance Levels Using Opening Range High/Low
The opening range refers to a specific part of the trading day: immediately after the session opens where institutional trading is generally the strongest, and price volatility is often at its highest. A common time slice for the opening range is 30 minutes. At the end of the opening range, the high and low become key support and resistance levels for the remainder of the session. Often either the high or low of the opening range becomes the high or low of the entire session.
Traders look for price to break out of the opening range, above the high or below the low, for a potential trend trade. If no breakout occurs, trading can often oscillate between the opening range high and low. (See Figure 3)
Volume-Weighted Average Price (VWAP) with Standard Deviation Bands
Another way to determine support and resistance levels comes from the idea that the market can be mean reverting even in trending markets. If the market moves too far away from the mean, there is a tendency for the price to revert to the mean.
How to calculate the VWAP
The mean in this example is the VWAP, which is calculated by summing the number of contracts of each trade multiplied by the trade price and then dividing that sum by the total volume of contracts traded. This gives traders a running average traded price throughout the session.
Adding standard deviation bands above and below the VWAP provides traders with potential levels of support and resistance that adjust dynamically to changes in market volatility. (See Figure 4)
Figure 4. Volume-Weighted Average Price (VWAP)
A common element of these indicators is that regardless of the intraday bar interval in the chart, these support and resistance levels generally will occur around the same prices. You will often see key price levels lining up across multiple indicators, which may indicate an even stronger level of support or resistance.
Using Support and Resistance Level Indicators in Your Futures Trading
Whether you are a day trader or swing trader, understanding support and resistance levels is crucial to determining entries and exits. Incorporating support and resistance into your market analysis can help you spot potential reversal breakouts and concern solicitation providing vital information to help you make better more informed trading decisions.
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