For a technical analyst, the concept of support and resistance is probably the most important. This is the very basic foundation of technical analysis and most of the studies, patterns, indicators, etc. are based on this concept.
Support is an area on the price chart from where the price is expected to bounce during a fall. This is a level where buyers kick in as they find a good value proposition which leads to demand overpowering supply and hence price reverses. Similarly, resistance is an area from where the price is expected to fall. This is a level where sellers take control and reverse the up-trending price to a downtrend due to excess supply over demand.
However, finding these support and resistance levels is a manual task and therefore requires a bit of extra effort from the analyst. But the major drawback is, that these levels are somewhat subjective and depend on analysts to analysts for their marking. Most of the time, it requires a trained eye to spot these levels and there are multiple ways to identify a good level which could be based on an indicator, price action, or any other study.
Here I am explaining one indicator that automatically marks these short-term S&R levels based on the price action – Fractals. So what is it and how it works?
Image Description: Daily chart of with Fractals, marking short-term support and resistance
Image Source: Investing.com
Let’s talk about resistance first. A peak is generally a good resistance and Fractals identify this peak with very specific criteria. A candle’s high which would be marked as a peak has to be the highest high in the preceding two sessions and the succeeding two sessions as well. In other words, in a group of 5 candles, the 3rd candle has to have the highest high, which (if happens) would be marked as resistance).
Similarly for the support, a candle/bar’s low would be marked as a support when the preceding two candles have a higher low than it and the next two succeeding candles also make a higher low. In other words, in a group of 5 candles, the middle one has to have the lowest low in order for it to be marked as support by Fractal.
This is the criteria that Fractals use to find the support and resistance via the highest and lowest points in a group of 5 candles. This lookout period can be changed to any other number. The higher the period, the longer would the time frame to find these S & R levels. Look at the image above for more clarity on Fractals. I have marked two Fractals (each for support (green arrow below the candle) & resistance (red arrow above the candle)) with an explanation. Observe the same pattern throughout the chart for other Fractals. You can use these price action-based S & R levels in your trading.
