What Is Resistance And Why Draw Resistance Lines

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(VIDEO) How to Properly Draw Support and Resistance Levels

The ability to properly draw support and resistance levels is one of the most basic skills every price action trader must have. It’s also the building block for everything that comes after it, including price action trading strategies like pin bars and inside bars as well as a proper risk to reward ratio.

Get it right and trading starts to become effortless. Get it wrong and your trading experience will most likely be a frustrating one.

In this lesson we’re going to define what a support and resistance level is, as well as why they form. We’ll also dive into how to properly identify these levels, and then we’ll finish things off with a few basic rules to trade by.

In short this lesson will help you keep your charts from looking like this…

And more like this…

A quick note before we get started. This lesson will only focus on horizontal support and resistance as I believe it to be the cornerstone on the topic of key levels.

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I’ll save trend lines for a later lesson as they have many different facets that deserve more attention.

What is a Support and Resistance Level?

A support and resistance level is simply a level in a market at which traders find a price to be overvalued or undervalued depending on current market dynamics. This creates a level in the market that can act as support or resistance depending on various factors surrounding each currency.

So that’s the “fancy” definition of a support and resistance level. Now for the price action trader’s definition…

A level at which we can look for price action buy or sell signals such as the pin bar. That’s really all we need to know. We aren’t concerned about why a level has formed. Instead, we’re focused on how important that level is relative to the surrounding price action. If it’s deemed to be an important (key) level that we want on our chart, we simply wait and watch for a price action buy or sell signal to develop.

Here is a great example of a support and resistance level in action.

What Causes These Areas to Form?

To understand why these levels form we have to go back to the supply and demand curve. I won’t spend too much time on this as the real benefit to support and resistance comes once you learn how to properly identify the levels.

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Notice how in the supply curve below, the number of units for sale increases as price increases. To put this in trading terms – the higher the price, the more willing traders are to sell their positions.

The demand curve, on the other hand, is the exact opposite. As price increases the number of units desired decreases. This is because traders are less willing to buy in a more expensive market.

We can, therefore, label a support and resistance level as a point in the market where traders are more willing to buy or sell, depending on market conditions. This creates an area of tension between buyers and sellers, which often causes the market to change direction.

Here’s how that looks when it’s applied to a market such as GBPNZD.

Now that we have a good understanding of how and why these areas form, let’s take a look at how to properly identify them.

How to Draw Support and Resistance Levels

The first thing I want to mention about support and resistance levels is that they aren’t always exact levels. In fact, most often these “levels” are better thought of as areas on your chart.

It’s a common misconception that a key level has to line up perfectly with highs and lows. This couldn’t be further from the truth as most support and resistance levels have areas where the market failed to respect it as either support or resistance. This is the reason we use price action strategies like the pin bar as confirmation that a level is likely to hold.

I don’t know about you, but I learn best when I can see something in action. Which is why I created a video to show you how I go about drawing support and resistance on my own charts.

If you’ll notice, the support and resistance levels I drew in the video didn’t always line up exactly with highs and lows, nor did the market always respect them. But that’s okay.

It’s important to understand that although properly drawn support and resistance levels can be a powerful asset, they aren’t without flaw. But as I mentioned earlier, that’s where price action signals come in to help us determine the strength of a level prior to placing a trade.

One last point about drawing your support and resistance levels. You should always aim to achieve the most touches possible on either side of the level. This usually requires you to move the level up and down a few times until you can find the place where the market touches that level the most from both sides (as support and also as resistance).

Remember that these levels represent areas in the market where traders are more willing to buy or sell, which can mean a change of direction in the market. So by moving a level to a place that achieves the most touches on either side, you stand the greatest chance of catching the move if and when it happens.

Rules to Trade By

Here are a few simple rules to follow that will vastly improve your ability to identify key areas of support or resistance.

Use swing highs and swing lows in the market to your advantage

By using the highs and lows as a guideline to start drawing your support and resistance levels, you’re more likely to capture the “key” levels. These are the levels that you should be interested in as they are the most likely to produce a valid price action buy or sell signal.

Don’t worry if the highs and lows don’t line up perfectly

Remember that most levels are not going to line up perfectly with highs and lows. Instead of worrying about a level lining up perfectly with highs and lows, you should spend some time making sure the level is at a place in the market that achieves the most touches on either side of the level.

Focus on the major (key) levels in the market

These are the most obvious support and resistance levels and should be immediately visible. If you have to search long and hard for a level, it probably isn’t worth placing on your chart. By only focusing on key levels you’ll be in a much better place to actually trade a price action signal when one shows up.

Stay within a six-month window

You don’t need to go back five years to find support and resistance levels. Most of the levels that you will need are going to come from highs and lows that have occurred within the last six months. Feel free to travel back in time once you have the level drawn, but don’t think it necessary to look back more than six months to find great levels to trade.

That wraps up this lesson on how to draw support and resistance levels. I hope you now have a better understanding of how to approach these levels and also which levels are most important.

Just remember to not over-complicate things. Drawing support and resistance levels should be one of the easier and stress-free things you do as a price action trader. In fact, I’ll go so far as to say that if you find yourself expending a lot of energy to find these levels, you’re probably drawing more levels than you actually need.

Keep it simple and most importantly, have confidence in your abilities! One of the bigger mistakes you can make is to second guess whether or not you’ve drawn a level correctly. It’s okay to double check your work, but just remember that your first instinct is usually the right one.

Your Turn

How do you go about identifying support and resistance levels? Share your thoughts or methods in the comments section below.

I always make it a point to respond to comments, so leave your mark below and I’ll talk to you soon.

Leave a Comment:

71 comments

HI JUSTIN ENJOYED READING YOUR SUPPORT/RESISTANCE MATERIAL WHEN I DRAW S/R I SWITCH TO A LINE CHART IS THIS A SOUND WAY OF DOING IT REGARDS MAL.PS I WOULD LIKE TO LEARN MORE ABOUT YOUR TEACHINGS.

Malcolm, it isn’t how I trade, but that doesn’t make it wrong.

Thanks for this educative and very enlightening post. However I wish to ask that if we are trading with the daily timeframe are we going to use the swing lows and swing highs of the higher timeframe to draw the support and resistance lines? Or is it the daily timeframe that we will use?

You’re welcome, Sam. That depends on what you feel more comfortable with. It will also vary depending on how far back the level goes. For example, if it spans several years, you’ll probably want to use the weekly chart.

Hy bennet i just want to know more about dynamic resistance and how to use it in the market

Really enjoyed the video and description! Hopefully one day I can be profitable trading!

Pleased to hear that, Codey. Let me know if you have any questions.

Hi Justin, i have always had it the other way around to draw my key levels: supoort and resistance. i would go to my weekly time frame and use the beautiful pin bars i find there to draw my levels. the high and low of the pin bar would then become my key level. these levels i use on daily time frame to trade with price action. how valid is this method, in your opinion?

If it works for you, then I’d say it’s valid. There’s no single right way to go about drawing support and resistance.

Enjoyed watching your video, just wondering what charting software do you use?

Pleased to hear that, Dan. The charts I show on this site come from MetaTrader.

how do you draw it then?need to learn how to draw

Sir, I had just read your “How to properly draw S & R Level”. It is really enlightening.
However, Sir, does the S&R levels that we drawn in a Daily Chart applicable to a 4-hour’s too ? Or, different set of S&R levels should be used ?
Rgds.

Pleased to hear that, Albert. You have to study the chart to determine whether the market is respecting a given level on the 4-hour AND daily or perhaps just the daily. Not all levels are created equal in that regard.

Enjoyed reading your blog sir…Iam a student from India.Iam planning to subscribe with you..I want to become consistently profitable trader..Pls give me all support..Thank you…

Hi Justin,
Enjoyed your article! Thanks for sharing it.
One question though, Do you agree that one of the trates of a good Trader is “Consistency” or “Discipline”? Which makes me think, Are there any Indicators, or Softwares (That you know of), which can draw these Lines, with consistency, and reasonable accuracy?
I be glad to hearing from you.
Many thanks again for the article, Loved it!
Cheers.
Les.

is it better to trade a monthly chart to capture more then 200 pips

is it better to trade a monthly chart to capture more then 2000 pips

Just a quick question, Which time frame do you use to draw your support and resistance level ? Daily or Weekly.

Since I have started following you l am learning a lot.thank you

you are best justin.

Nice work Justin. I never knew support and resistance are not much difficult to identify and marked on chart. I am so happy for this wealth of knowledge. Please keep up the good. God bless you more.
Best regards

Very much clearance about drawing level

[…] a market have to be trending or can it be range-bound? Does the pin bar have to occur at a support or resistance level or will you also consider trading continuation pin […]

[…] for the content, you should focus on the significant market movements. Did a pair break support or resistance today? Did a pin bar or inside bar form? Is a market forming a technical pattern that may lead to […]

That was a great article.

Plain and simple. So glad I became a member. My trading insight and though process have improved.

I am now calm and relaxed when looking at a set up and placing a trade.

Thanks so much, you make learning forex so simple.

Just want to know how to get that charting software

I have read the article and understand fully the concept. I am eager to add this to my practice . I really want to be a full time trader and appreciate all the help I can get. Thank you Justin

Antony here, Do you recommend that Support and Res works well on the daily timeframes? Here is my number I need to ask you something +27 782 8550.

Enter your comment…what a fantastic lesson indeed thanks alot for up lifting my passion on forex

HI, It’s the first time to your site. Love the information. I’m trying to take it in and keep in mind that I need to keep it simple and not over complicate it. I’m a newby and hope to absorb the information so I can feel confident to start some buys and sells. Thank you for sharing your knowledge. I’ll be coming back.

Learn how to drawn supports and resistances

Thank you for putting this up……. U simplified this mystery to me……. Am new in forex I hope follow up on u.

Thank you bro, u clear my mind with good explanation, i always have doubt to draw S&R on High/low or on Open/Close candle… i’m really clear myself on this S&R lesson..

once again….Thank you so much bro ��

I like your write up, it is so interesting, but my question is if one observes a pin bar at the support or resistance level in the morning, is it encouraging to place trade order even when the current day trade has not stope

Great stuff..u are a good teacher

this video is useful and as lots of insight

Thank you so much

do banks and big market makers use S&R as well? and if yes, in the same way? Thanks.

Sir, I read you S/R Horizontal Key Level It is really nice and very helpful for my but I am often confuse about trend line. Can you share me how to draw trend line. Thanks

I love using the weekly and monthly chart using a line chart format to get my key levels

I have to thank you for your service to mankind I didn’t know you can trace back for just six months, I use to go three years back,thanks for this great lecture on support and resistance

Ya ur right, i feel comfortable in reading & understanding the concepts, will apply in trade from now on wards & let u know my feeds back asap. Thanks & greetings.

Hi Justin,
I read that Weekly TF chart major support and resistance levels have more weight as well when trading on the daily TF charts. How do you differentiate between Daily TF support and resistance levels and Weekly TF support and resistance levels? What if Daily TF swing high and lows are nearby to Weekly TF swing high and lows? Would you not mark them even if they were close?

Thanks for all the details an explanations, I have now understand. I think am in the right place with the right people. Although am a trader but l have not got to this extent. I started trading about three months ago an I have not been making profit due to little experience.

I have went through the swing trading cheat sheat, it’s interesting an I will put what I lean there into practice . Thanks

Thank you justin

[…] ‎Support and Resistance Levels · ‎3 Powerful Techniques to … […]

Hi thank you for your time and lessons so far on support and resistance.am already working on my chart. If I have any questions I will get back to you.

Liked your lesson hope to learn more from u since I dnt hv much experience in trading but little by little tbe info u guys give us is great

Thanks Justin, you have answered a question that’s been nagging at me, how far back do I look to draw “support and resistance “ levels. And the answer is 6 months. ��

to draw S/R lines i change to line graphs and swing highs and lows become more visible

Great lesson, I purchased your lifetime member program 4 days ago. I am Looking forward to receiving my account login credentials so I can view membership lessons and materials. Thanks

This commentary sections in your lessons are awesome. Just by looking at the answers to some of these questions I am expanding my knowledge and learning a lot more, thanks

[…] to any financial market, you can consider support and resistance lines as supply and demand. When you look at charts, you see these lines acting like barriers and […]

I normally look for areas where price seem to have clustered for a while before moving. There, I draw my resistance and support. Now with your lesson, I have learnt that I have to look out for those areas where there is pin bars to draw my resistance and support. Thanks.

You’re welcome. It won’t always be a pin bar. It’s a little less precise than that.

Is there any tools to draw S&R automatically

Thank you Justin u the best, my question is if i draw S/R on the weekly and daily time frame than i decide to trade on the 4hour should i draw S/R on the 4hour too? pls help thats all i want
to know

Well, it would probably help if the level is visible on the time frame you’re using. Not quite sure if that’s what you’re asking here.

Hello Justin! Thank you for your very informative and useful content, sure appreciated by every comprehended trader. My question is how often/after what time interval do you make revision of your determined levels on your chart? I’m interested about your approach, how you do that. Thank you.

You’re welcome. There is no set time interval. I only make changes to a level if the market gives me a reason to do so.

This is a good article for a beginner like me.

[…] a trader is using raw price action or simply using it to identify key levels in the market, price action plays a major role in any […]

Thank you sir. Your teaching and instructions have so much blessed my forex training. You talked about price action buying or selling signal forming on these levels, and you mentioned pin bar. My question is that, is it only pin bar that I should expect to see on these levels? Are there other price action signals that should be expected on these levels? Thanks.

Top notch,as always. Love your stuff Justin. Kudos to ya’Pal!

Hi sir i cant open ur SR video

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How to Draw Support and Resistance With Confidence

Drawing support and resistance levels can be confusing in the beginning. Here’s the exact process of how to draw the best lines, for maximum profit.

By: Hugh Kimura | Updated: March 11, 2020

When you first learn about support and resistance (S/R) levels, it seems a little like voodoo. Price seems to magically hit a support or resistance level, and turn on a dime.

“This is easy,” you think to yourself, as you go through the price action trading course.

But when you actually draw the levels yourself and try to trade them in real-time, it’s a whole different ballgame. The levels you draw seem to get violated all the time.

If you haven’t tried this yet, give it a whirl. I struggled with it for a long time.

The key is to learn how to draw support and resistance levels correctly, so you give yourself the highest probability of success.

In this post, I’ll show you why support and resistance levels work, why they fail, and the best way that I have learned to find significant support and resistance levels.

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Table Of Contents

Why Support and Resistance Works

At first, it may seem weird to be drawing these lines on your chart and expecting price to react when it reaches a line.

But there is a reason why support and resistance trading works.

When we buy and sell anything, there is a price range where an item is considered cheap, and when it is expensive.

For example, would you pay $1,000 for a cup of regular coffee at Starbucks?

Starbucks coffee is probably a little overpriced as it is, and that’s fine.

But $1,000 is ridiculous.

On the flip side, would you pay $1,000 for a brand new BMW M3?

Oh hell yeah! It’s basically free.

You get my point.

Currencies prices operate on a similar principle of “cheap” and “expensive.”

Traders also call expensive: “rich.”

The only difference between currency pairs and a cup of coffee is: What is considered cheap and expensive in Forex, changes by the minute. For example, here are examples of areas on an EURUSD chart where cheap and rich has changed over time.

Also notice that the more times a level is tested, the weaker it becomes.

The range of prices can also be very wide with currency pairs because there are so many factors that affect the value of a currency pair…

  • Changing interest rates
  • Wars
  • Political turmoil
  • Central Bank policies
  • And more…

Traders remember these cheap and rich price levels. That means that there can be big orders and existing positions sitting at these levels.

To put this in car terms…

The base retail value of a new M3 is currently about $64,000.

Serious buyers in the market for a M3 would certainly buy a new one for $30,000 (cheap) and stop buying, when price reaches around $75,000 (rich).

If the price of a new M3 could ever reached $30,000, buyers would probably have an alert setup on their phone or they would have a dealer call them. Obviously, this would never happen, but it illustrates the point.

This would be the support level for M3 prices.

In a similar fashion, 1.1200 might be cheap for the EURUSD currency pair, this week. So every time price reaches that price, traders will buy the pair, which will drive the price up.

Once you understand the principle of cheap and rich, and how the markets “remember” these levels, support and resistance makes perfect sense.

But it’s not a guarantee…

Why Support and Resistance Levels Fail

Let’s get something straight right now…

Support and resistance levels are NOT hard lines.

Price does not have to bounce at that level. They are merely zones where price has a good probability of turning.

If you think of them in this way, they become much more useful.

…and a lot less frustrating.

For example, many people who are new to drawing support and resistance levels would probably draw a resistance level like this.

…and that’s a very good line.

However, some traders will look for price to bounce off 1.1441 exactly and head back down.

But in reality, this level is more of a zone. Like a trampoline, it has some give.

It might look something like this…

As we move this chart forward, we see that using this zone is much more useful in giving us a good level to take potential short trades. Even if you just draw a single line, you should understand where the other edge of the zone might be.

With this in mind, there are two basic reasons why support and resistance levels fail.

First, some traders simply don’t draw them correctly or don’t think of them as zones. How do you know if you have drawn a zone correctly?

Well, there are no guarantees. But price will either respect the level, or it will at least have a significant pause at that level, before breaking through.

I’ll get into the exact process of how to find the best levels, in a bit.

Second, the market move is so strong, that the support or resistance level does not hold.

You are going to be wrong some of the time and even the best drawn levels do not hold.

So if a level gets broken, now you know why it happened.

When it does happen, first ask yourself if you drew the level correctly. If you did, then there is nothing more that you can do about it.

Don’t sweat it and move on…

How to Draw Support and Resistance Levels the Right Way

Here’s a list of the steps for figuring out how to draw a good level. After the list, I’ll go over each step in detail.

  1. Look for the next major support and resistance level immediately above and below the current price
  2. Examine how much price rotation there is around a level (and don’t forget the elbows)
  3. Take a look at historical price action to see if the level makes sense
  4. Repeat the process to find the next major support and resistance levels
  5. If you are really stuck, then switch to a line graph

Look for the Next Major Support and Resistance Levels

You don’t have to draw every single S/R level on your chart. That will drive you freakin’ nuts.

…kinda like having too many indicators on your chart.

All those lines will talk you out of good trades.

But a few good lines will give you clarity.

So draw just one support level below the current price level and one resistance level above. Don’t be too concerned about being exact at this point.

Just draw it in a place that makes sense to you right now. We will optimize it in the next step.

Here’s an example…

Remember that you are looking for a major support level and a major resistance level.

Here’s how to tell if it’s a major level…

Examine How Much Price Rotation There is Around a Level (and Respect the Elbows)

Now that you have drawn two (and only two) lines on your chart, it’s time to examine if those lines are positioned in the best possible place on your chart.

The easiest way to figure this out is to see how many times price has hit this line. You will usually have to adjust your line a little so it hits as many points as possible, above and below your line.

In the example above, I think that both lines are drawn in a good location. Price hits those lines from the top and bottom several times, showing that they are significant levels.

Price might break your line more times than you are comfortable with. Occasional big breaks can be OK. Sometimes price just needs to break out of the zone for a bit, to clear out existing orders.

One such pattern to watch for is the “elbow.”

What the heck is an elbow?

The best elbow formations on this chart are marked in green. Above the elbow (in a valley) and below the elbow (in a peak) can act as support and resistance levels too.

It is simply a type of rotation point where price failed to hold the line and price snapped back. I wouldn’t trade elbows by themselves. But if your lines fall on these levels, it is a good indication that the level is valid.

Here’s another example of a significant elbow.

Also pay attention to the wicks and bodies of candles. I would give a body more weight than a wick. In the charts above, you will see that the S/R lines pass through several wicks, but not very many bodies.

Examine Historical Price Action

Those lines look really good huh?

Well, don’t pat yourself on the back just yet. Now it’s time to scroll back on your chart and see if those levels still make sense.

You don’t have to go back to the beginning of the chart. But at least look at recent history and also check the next higher timeframe.

If we scroll back on the first chart in this section, we see that these are very good support and resistance lines because they are still valid with older data.

When you see this, it will give you more confidence that you have drawn the right support and resistance lines.

Remember, what is considered cheap and rich, changes over time. So your historical levels might not match up exactly with your current levels.

But as you get some practice, you will start to see which levels are more significant.

Repeat the Process to Find the Next Major Support and Resistance Levels

Now repeat the process to find a second set of support and resistance levels. You need these levels to give you good profit targets or stop loss levels.

Here is what the second set of major S/R lines would look like on the previous chart.

…and that’s all you need to make your next trading decisions for this currency pair, based on support and resistance.

In this example, the next major levels are pretty close. They are more like the other side of the zones. So you might be better off waiting for price to react to the outer lines than the inner lines.

If You are Really Stuck, Then Switch to a Line Graph

I learned this one from my friend and mentor Walter Peters.

If a candlestick chart doesn’t provide an obvious support or resistance level, then switching to a line chart can help a lot.

Since a line chart only gives you the closing price, it shows you the final price that traders decided on, at the end of each time period.

This is very important information. In the battle between the bulls and the bears in each candle, it will show you who won.

For example, it can be difficult to see the resistance level on this chart. This might be my first guess at drawing the line, since it touches most of the candle wicks.

But I wouldn’t be totally sure about that one. When I switch to a line chart, this level becomes more obvious.

Now when you jump back to the candlestick chart, here is where the line ends up being. This is a better level, in my opinion, because it incorporates more of the major price reactions.

Again, support and resistance levels are more like zones than exact lines. But more precise lines can save you a few pips in your entry price or exit and greatly increase your return over time.

Conclusion

Now you know how to draw support and resistance lines. The only way to get good at this is to practice in live market conditions.

So practice as often as possible. Add support and resistance lines to charts that you aren’t even interested in trading.

Then add your prediction of where price will go at that level. I like to use an arrow in TradingView.

When drawn properly, horizontal support and resistance levels can be powerful places to enter trades and set great profit targets.

It’s not an exact science. But just like anything else in trading, you are just looking for an edge.

…and support and resistance lines can give you that edge.

Support and resistance levels explained

Support and resistance levels can help traders gain extra insight into the strength of a price trend. Here we define support and resistance levels, explain how to identify and draw both lines, and more.

What is support and resistance?

‘Support’ and ‘resistance’ are terms for two respective levels on a price chart that appear to limit the market’s range of movement. The support level is where the price regularly stops falling and bounces back up, while the resistance level is where the price normally stops rising and dips back down. The levels exist as a product of supply and demand – if there are more buyers than sellers, the price could rise, and if there are more sellers than buyers, the price tends to fall.

The more often a price hits either level, the more reliable that level is likely to be in predicting future price movements. It often happens that both levels become psychological barriers for traders, as they tend to buy or sell once a level is reached. This only strengthens the result.

If a price touches or breaks through a support or resistance level but jumps back fairly quickly, it is only testing that level. But if a price breaks through any given level for a longer period of time, it is likely to keep rising or falling until a new support or resistance level is established.

How to identify support and resistance level

There are a few ways to identify support and resistance levels. It’s quite easy to spot these levels, but they can be very useful in helping you choose the best time to enter a market, as well as where to put your stops and limits. To identify support and resistance levels, traders can look at:

1. Historical price data

The most reliable source for identifying support and resistance levels is historical prices, making them invaluable to traders. The key is to familiarise yourself with past patterns – sometimes from very recent activity – so you can recognise them if they appear again. However, it is important to remember that past patterns may have formed under different circumstances, so they are not always a reliable indicator.

2. Previous support and resistance levels

You can use previous notable support or resistance levels as markers for possible entry and exit points, as well as indicators of future movement. It’s important to note that major support and resistance levels are rarely exact figures. It’s unusual for a market to hit exactly the same price time after time before reversing, so it’s probably more useful to think of them as support or resistance zones.

3. Technical indicators

Technical indicators or trendlines – such as the ones covered later in this article – can provide dynamic support or resistance levels that move as the chart progresses. Support and resistance levels for different markets will often be based on different factors, so developing the ability to recognise which levels are going to impact a market’s price can take time. For that reason, it is important to practise identifying support or resistance levels using historical charts.

How to draw support and resistance lines

To draw support and resistance lines on a chart, you first have to find them by using one of the following methods:

  • Peaks and troughs
  • Support and resistance levels from a previous timeframe
  • Moving averages
  • Trend lines

These are covered in detail in the sections that follow. To establish the strength of the support and resistance lines, you can combine these methods.

Peaks and troughs

To draw your lines using peaks and troughs, select your timeframe, then identify the highest peak on the chart and do the same with the lowest point. Mark each peak and trough. If there is a downtrend, the support level will be the lower-low peak and the resistance level will be the lower-high peak. Conversely, if there is an upward trend the support level will be the higher-low peak and the resistance level will be the higher-high peak.

Previous timeframes

If you’re using support and resistance levels from a previous timeframe, choose a short timeframe, for example 15 minutes. Then, draw the levels from the one-hour and four-hour time frames on the 15-minute frame. If the levels from the longer time frames are very similar or equal to the levels from the shorter time frame, these could be considered strong levels of support and resistance.

Moving averages

The moving average indicator is another way to identify support and resistance levels, and draw them on a chart. With the indicator enabled, draw a diagonal line from the highest peak to the lowest peak to see which way the trend is moving. If the trendline moves up, this moving average line will act as a level of support and vice versa. This is called dynamic support or resistance, because the levels are constantly changing.

Trend lines

If you are using trend lines, make sure you have at least three peaks or three troughs before you draw your lines, so that you have a useable trend line. Then, once you’ve plotted the trendlines onto your chart, your uptrend line will be the support level, while the donwtrend line will be the resistance level. As with moving average support and resistance levels, these levels are dynamic.

It is important to combine one or more of the above methods to establish the most accurate support and resistance levels.

Support and resistance trading strategy

Using support and resistance levels as a trading strategy is one of the very basic methods of trading. It can be used to manage risk and place stops, determine the market conditions, and find appropriate entry and exit positions. The most common trading strategy using support and resistance levels is buying (going long) when the price is closing in on the support level and selling (going short) when the price is moving closer to the resistance level. However, traders should wait for some confirmation that the market is still following the trend.

Placing stops and limits below support and above resistance is also recommended. It helps traders to close a position quickly if the price breaks through levels of support or resistance. Before you place the trade, consider your profit target and what you consider to be an acceptable level of loss, then decide on your exit points near the support and resistance levels.

Another strategy used in support and resistance trading is the breakout strategy, whereby traders wait for the stock price to move outside either level. A breakout is not just a slight movement beyond the support or resistance levels. It is defined by particularly sudden and rapid movement with increased momentum, which creates opportunities for profit.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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Finding an Edge with Support and Resistance

Today I would like to introduce Karen of Wealth Wizard World. Karen is an experienced trader who took an interest in the markets at a very young age has continued since then. Through her own blog and website, Karen shares what she has learned in her twenty-plus years and today she has agreed to share this knowledge with Trader’s Blog readers as well.

I’ve traded for many years – about 20 to be precise. During the early years, I read everything I could get my hands on and tried several methods. The lessons learned were not what to do, but what not to do, and yet I was looking for something more.

There are lots of indicators to use and chart patterns to watch. What bothered me was that I realized that indicators lag. They respond to the movement of price.

Chart patterns work very well for some people, but they didn’t do much for me. I saw several head and shoulders patterns break to new highs; flags, pennants, and wedges break opposite of what they were supposed to do. What was an eager, studious, young trader supposed to do?

Finally it dawned on me – price! Price is the king of the chart. I started paying closer attention to price action. My reading focused on those experts that relied most on interpreting price movement. What I learned is the foundation of all my trading. It’s not a 100% foolproof method, but it helps keep me in winning trades and letting go of losers.

I’m going to show you the basics of how I find support and resistance on a chart. This method will show you, in advance, where prices are apt to stall or where they may rebound. I will also demonstrate how to use a couple of indicators in conjunction with support and resistance that will boost your confidence in your trading decisions.

This is really a very mechanical system and that’s why I like it. There is no emotion, just reaction. There is no guesswork, but verifiable, actual numbers. It works on any time-frame and in any market that is traded –with stocks, ETF’s and indexes. You can see, in advance, where you need to be prepared to take action.

Trading is like war. You’re battling some very smart and very well-capitalized opponents. To be successful you need an edge. What I’m about to share will help you gain an edge and hopefully, put more money in the bank.

Identifying Support and Resistance

Resistance is an area where price was rejected and then declined or consolidated. Support is an area from which price rebounded or consolidated. Prices tend to cluster around areas of prior support and resistance. It’s as if price has a memory. Here’s an example of the S&P 500. What would it mean to you if you knew in advance, where price might hit resistance or find support?

I suggest you use a candle chart. Ignore the wicks, but pay close attention to the solid candle body. Go back a couple of years and look for a smooth trending stock, because if it trended once, it will again. Following is a line chart showing a smooth trending stock.

I avoid stocks like this one. It is all over the chart, with no particular direction:

Drawing Support and Resistance Lines

Here is the method I learned to draw support and resistance lines. Find a stock or ETF you’re interested in and find the last swing low. The first candle that starts to reverse your low is the starting point for a trend line. Draw the trend line up from the swing low and make sure it touches the candle bodies, but not the wicks. Watch for a red or down candle that reverses the trend. The top of that candle is your resistance line. Draw a line across the top of that red candle body.

Make sure your software lets you draw a support line that extends through all prices moving forward. Those lines are not only support and resistance today, but will be so in the future and we want to be able to see them.

Here’s an example of how to draw a resistance line:

To draw support lines just do the opposite – find the first candle that begins the swing down and draw the line straight down making sure you have 3 candle body touches. The first green candle that pierces the down sloping trend line is your support candle – draw a horizontal line beneath that candle.

This is the same chart of the Dow Jones Industrial. The white horizontal line is at the top of the red candle and is the resistance line you just drew.

Once the swing hit resistance it made a big red candle and started a swing down. Your support line is drawn beneath the first up or green candle that breaks the trend line. The swing high and resistance I’ve left in white the swing low and support I’ve marked in blue.

That’s all there is to it! Just keep drawing trend lines and marking support/resistance every time a swing breaks your prior support or resistance. Just make sure you have 3 valid touches of a candle body to draw a valid trend line.

Now I’ll show you the real value of this simple method.

This is AAPL, one of my favorite stocks to trade. I drew the support/resistance lines starting at the first horizontal white line, January 2007, and I stopped drawing new support/resistance lines, December 2007. Notice how well price was contained within support and resistance for that year. But wait . . . .

Look how well these same lines defined price movement in 2008 . . .

And again in 2009!

I recommend that you go back at least 2 years and start drawing support and resistance lines on a daily chart. You’ll also encounter swings between your support and resistance lines. If the distance between support and resistance is greater than 10 points and I can draw a valid support/resistance line between the larger range, I’ll do it.

Try this on your own charts and see how it works. It takes a little practice, but it works because I can plan my entries and exits in advance with no guesswork. Now I’ll show you a couple of trading strategies I use with support and resistance lines.

This is the same AAPL chart with a 20 period simple moving average in blue and a 50 period exponential moving average in red. In an uptrend I will sell ½ of my position if price breaks below the 20MA and the nearest support line. If the 50 EMA is breached along with the nearest support then I’m out of the entire position. I’ve marked those areas in pink on the next chart.

Conversely, I’ll buy when price exceeds the 20 MA and the nearest resistance line and I’ll add to the position every time this occurs. I’ve marked these spots in gold.

Another strategy I use involves plotting Stochastics on my support/resistance chart. I like the slow %k Stochastics as an overbought and oversold indicator. The settings I use are an 8-3 with an 8-3-3 slow %d. As the indicator oscillates back and forth I watch for readings that are above 80. When the %k rises above 80 then I find my nearest resistance line. I put that stock in a watch list and then wait to see if it will fulfill the rest of my trading requirements to go short.

Conversely, I’ll watch the %k when it nears the 20 level. I find the nearest support and then wait to see if my trading requirements are met for going long.

Here’s a chart of ANR that I’ve marked with the areas I described.

As I write this on January, 21, 2020, the indexes have been moving up one day and moving down the next. There is no perceptible trend. Take a look at my S&P 500 chart – I’ve been watching a 20 point range between support and resistance for quite awhile. Price hasn’t been able to advance past 1148. Today, price broke support at 1128.

Imagine if you had kept support/resistance lines on only the major indexes. You’d be able to make decisions in advance and with more confidence. The more aggressive trader might even take a short position or two.

I hope you’ve found some ideas that might work for you or that you can use to build your own trading plan. Whatever method you use, remember:

Make sure that your trading plan is sound and based on verifiable results.

Obey your trading rules without hesitation.

—————————————————————————————————
As a kid instead of reading the comics from the newspaper I learned how to read the bid and ask columns from the stock page. My first trade was as a teenager and I got hooked on the idea of money making money. My career spans more than 20 years. After graduate school I did a short stint as a stockbroker and then ventured out and founded my own company. Today I trade only my account and offer advice to a few close friends.

Educational material can be found at my website: www.TradingSystemsSite.com.

39 thoughts on “ Finding an Edge with Support and Resistance ”

I agree support & resistance is the creme of the crop. I use the Whyckoff method for trading ranges & VSA for trends. I have found indicators work best if we use then to test what we see in a chart. For example in most cases the MACD will cross over from buying in the market such as a breakout, we use that as a set up as the market is over bought then as the MACD has it’s second cross, that would be our trigger as long as we see higher lows in momentum, as long as we can locate enough buying in the market that supports the market it’s all good. For those that live on indicators, I suggest use them to test prior market movement on what you see in the chart. If a MACD crosses & we look to the left of the chart & we can not locate any buying then sure enough this would be a false breakout because buying of the professionals must support market moves if we are to expect higher prices. I prefer to use channels & trend lines then moving averages however I find moving averages useful for scanning to filter out bad apples from good ones. For swing trading I suggest use the MACD histogram for over bought & over sold areas.. this works well as momentum increases from a pivot low. For momentum trades I suggest buying any down bar in a trend, as long as your trending up & you missed the breakout, you can catch the wave on any down bar as long as the market tries to fall on low volume & can’t make the grade. I generally mark any areas of high volume, these would be important areas of support & resistance where there is buying & selling, where professionals are active in the market either selling there holdings into the buying or buying into the selling supporting the market. If we want a more automatic way of trading, indicators can be used but like I said, they are best suited to test prior market movements such as a williams gives a buy signal, we test that as it swings high to over bought then fall & as it falls we wait for it to hold above it’s prior over sold giving a false swing indicating the market is to strong to reach over sold suggesting the market is ready to mark up. I find this best suited for those wish to bypass false signals & trade on stronger ones by testing cross overs & what the market what to & is able to do. Plotting support & resistance lines as suggested in this article is good strategy for planning however remember true support & resistance or areas of buying & selling that influences the market carries higher volume activity & these areas must be considered important in the future. This article suggested price clusters in areas of support & resistance.. how true but keep in mind when price clusters, this could be buying before a mark up. When price clusters, something is holding up the market to make no real progress on activity. These areas should not be traded but instead should be tested as price breaks out then falls back down where prior resistance becomes support producing a low risk entry. Break outs are great as a trend starts it’s move but in the middle of a channel any breakout should be tested before entry by buying into the next dip otherwise we risk buying into professionals unloading there holdings in what they considered to be a weak market. I find breakout best for areas of accumulation where dips are best suited for when a trend is under way where there is higher lows. If we buy every breakout, we will eventually lose the game therefore breakouts when risk factor is low at areas closer to the bottom in the mark up & dips, pull backs, back ups are best when risk factor is higher near the top of the channel or to extended from it’s 50 day moving average.

Hope this helps the newbies.

You’re looking for a candle that breaks the trend line in the opposite direction. Hope that helps!

Thanks for your reply. I have another quick question for you. You mentioned once the trend line is pierced by a candle of opposite color then draw the S / R line across its base. By pierce do you mean a candle that closes above/below the trendline? or just an interesection the trendline is good enough?

Thanks again.
Bobby

I’ve passed this blog on to a few others like myself who are novices but have really tuned in over the last year and one half and now feel ready to enter the market and hopefully the markets are giving us an entry opportunity. My question: do you have any trades going on right now in the market? And if you do can you tell us what symbol so we can examine it with the tools you have given us.

The stocks I’m currently trading are: AAPL, AMZN, GLD, WLT.

If you keep an eye on the blog I usually publish a watch list when conditions are starting to come together and new trades are on the horizon.

Hi Karen, Thank you so much for a very interesting and informative article. I’m a newbie and I trade the forex market. I presume your guidelines holds for the forex market as well. In drawing the trendline that initiates a new trend to the upside must all three candles be green? or red in a downtrend? Also why do you ignore the wicks in drawing the trend lines.

Thanks so much, much appreciated.

Yes, this techniques works on any market and on any time frame.

No, the candles don’t need to be all up candles or all down candles to draw a trend line.

I ignore the wicks only in the drawing of the trend lines.

I’ve found that the bodies more accurately reflect the median area of support and resistance. Since the wicks reflect the high and low they really are not as representative of where support and resistance may be found, but reflect a margin of error that one should consider when looking at support and resistance lines.

Thanks for the question!

Andy, don’t worry about touching every candle’s body as you draw the trend line — three touches make a valid trend line. Draw straight up from your initial candle and see where three touches occur — that constitutes your trend line.

Using your starting date, March 10, 2009 on the S&P 500 the trend line I draw touches the candle bodies on the 17th, 18th, and 19th. The 20th makes the break of the trend line so put your resistance line at the top of the body on that candle.

You’ll see that March 30, 31, and April 1st respect that line as support. The up move starts again and isn’t violated until April 7, so you have three candle touches April 1st, 2nd and 3rd with the resistance line drawn at the April 7th candle.

Hope this helps!

thank you Karen.
i am confused even more now ��

“Draw straight up from your initial candle”
i think this is what’s getting me in trouble
i draw the line “straight up” thru mar 10,12,13 and mar 16 goes under the trendline breaking it, right? so then mar 16 top becomes the resistance as per article “Watch for a red or down candle that reverses the trend. The top of that candle is your resistance line”.

what am i missing here? thank you!

I sent you a chart along with a reply . . . let me know if you don’t see it . . . hope it helps.

Thanks but I have not received the chart you sent.
I did send you my email, so hopefully you can resend it to me.

Andy, I don’t think you’re missing anything — I can send you a chart — I’ve left the trend lines so you can see where the break occurs and the resistance line drawn.

I can’t attach a chart, but would be willing to send it if you have an email address for me . . .

Karen, thank you for the article.

Question: let’s look at the sp-500.
On march 10 there is a reversal and the support @ 680.
So I draw an upward trendline right thru the next 3 candle bodies.
This trendline is pretty steep and will probably never be broken.
As a result, I cant seem to identify a “reversal” day for this.
What am i doing wrong?

I watch a list of about 10 stocks. My “Universe” of candidates (stocks that are under consideration) numbers 300.

I usually have at least 2 trades on, but not more than 5.

When a member of my list of 10 no longer trends in a fashion I can follow then I put it back in my Universe and wait. For example, I trade AAPL a lot. If AAPL would start a long period of consolidation it would go back in the Universe until it broke free from consolidation and looked ready to move.

Hope this helps!

Val here once more.

I was wondering whether you tend to trade particular stocks all the time and also would love to know how many stocks/pairs you normally trade and how many do you think we should be looking at to prevent information paralysis happening !!

Thank you for your interesting presentation of support and resistance, which is apparently applicable to all trading markets and all time frames. Is there a general theory that explains why market prices exhibit the support and resistance phenomenon? Surely this is something that has attracted attention in academia. Where might I go to find such information?

Frank, you’re right, academia has spilled lots of ink and much debate on the topic. Try doing a search on the laws of supply and demand, or fear and greed in cash markets.

I think an argument could be made that support and resistance lines are graphical representations of emotion. Trading is such a wonderfully awful profession — as traders we must manage our emotions, but understand the predisposition of the market. If it was only about finding the correct mathematical formula many more traders would be making money.

Well. that is a mouth full. I’m definitely going to spend some time “researching” this on the weekend. Thanks for the food for thought. and I’m excited to follow your blog. I’ll be in touch. Thanks.

Great article. Very useful. However I don’t think trading is a “war”. I think it is more like a “party”. You join the party when everyone is joining at the start of the party. You leave when the party is over. You may not be welcome if you arrive to the party too early, or you want to stay around after all other guests have left.

Interesting way of thinking about it TrendFollower — the parties I attend don’t involve people trying to take my money! ��

Karen: I do not fully understand the terminology “swing low” and “swing high”. Do these represent the turning points in each and every trend?

In essence, yes. The swing high or low is the last high/low point before the direction change — also called a pivot point. I have an example drawn on my blog in a post entitled, “the old 1-2-3” that might be helpful to you

how 2 access ur blog in d post entitled “the old 1-2-3”

Very nice! Thanks for being so open about your techniques.

Very interesting information. I have used 8,3,3 on the stochastics previously. I have tweaked it to 7,3,3 as i found this combination to give a better fit lately.

Karen,
How far back do the ANR support/resist lines originate.
Having trouble replicating.
Doug

The plots for support and resistance on the ANR chart started in 2008.

Nice post, I am currently using a 22, 51, and 200 day moving average for swing trading as this seems to be working best for my parameters at this time given the neutral market conditions. Once we start gaining more volatility towards the up/downside I will adjust my moving averages appropriately. I am now learning about analyzing several doji bars which have been playing a key role in my buy and sell decisions when testing a moving average.

Nice information. Let me get this Stochastic setting correct. My platform shows:

%D Slow (D interval 3, K interval 8)

%K Slow (interval 3

Is this correct?

Thank you in advance

All software seems to be a little different regarding how they label their settings. My settings are really simple: my time period or interval is 8 for both %k and %d and the smoothing or average for both is set at 3.

Hope this helps!

That was K interval 8

most deep you get into this world, more you realize you need to keep it simple!

thanks for remembering us that.

Thank you Karen. I just wrapped up my first year of trading after belonging to two online trading communities. Talk about a head swirly! This, I can connect with.

I felt the same way when I got started, Nan. If you go slow and practice you’ll not feel so overwhelmed — remember, you don’t have to know a lot of techniques to be successful, you just need to master a few!

Good advice to go slow. I am methodical and my goal is to manage risk and build success step-by-step. Your post untangled the threads I have read all year. I now feel I can assemble a logical chain to follow.

QUESTION:
The MAs throw me off. The MAs on a 3-month chart and a 3-year chart obviously reads differently, thus, buy points aren’t the same. When timing buys, do you use a certain MA/time period combination? Or simply the 20SMA and 50EMA. (I’m probably missing the obvious.)

I look at a daily chart with the 20 and 50 MA’s. I base my entries and exits based on MA’s and the support and resistance lines.

I have read your piece about managing Support & Resistance and have to say I am greatly impressed with your ideas.

It makes a load of sense and its something I will now start to look at in more depth.

I assume you are doing this mainly on large, liquid stocks ?

KIND REGARDS,
VAL

Thanks for the kind comments, Val. Yes, I like liquid stocks and use this techniques on stocks with an 20 period moving average volume of 750,000 or greater.

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