Learn How To Draw Support and Resistance Levels Like A Boss
Nearly every single technical based trading system will rely on you – the professional Forex trader, having the ability to correctly draw support and resistance levels on your price charts.
Mapping out your levels is going to be the most important core skill for any serious trader. If you have trouble marking your S/R levels accurately, then your trading as a whole may implode… violently.
What is built on a weak foundation will eventually crumble
Everyone is going to have a slightly different approach to getting their charts marked out, but it is the end result which counts.
I’ve seen some Forex sites posting up their opinions of support and resistance levels so you can just check in from time to time, clone those horizontal price levels on to your chart, and not have to think about the process at all. This is not the right way to go about becoming a legitimate trader.
Marking support and resistance is Forex 101 – once you learn the easy process of marking out price levels, you won’t need anyone to supply you theirs. Think about it in this way; It’s really like cheating on a test – you could be copying the wrong answers, you don’t learn anything, and won’t grow as a trader.
If you’re reading this, then you probably don’t want ‘a free lunch’ and have the thirst for knowledge with a goal to improve your own chart reading skills. Build good habits early and they will stick with you forever.
I am sure you want to be able to independently, and confidently read a price chart – if you’re just piggybacking off of someone else’s opinions, you will never truly get there. So today, I am going to show you the processes I use to plot support and resistance.
You don’t need any fancy tools – just your own eyes to scan the price charts. It will be a major determining factor in how successful you are as a trader!
In this tutorial, I am going to cut through the confusion, and introduce you to the powerful basics of marking support and resistance.
Stop Making Support & Resistance A Complex Task
I see all these charts getting posted around on forums, and they look like a child’s finger painting drawing, or the NASA control panel for space missions.
This is an epidemic with traders and it is really screwing with their ability to ‘read’ a price chart. Most truly believe that being complicated gives them a competitive edge over their fellow market participants.
With this sort of mentality, traders are really driven to go overboard in the hope they cover every technical basic possible, and make sure nothing ‘slips under the radar’.
In order to gain any traction with trading, I truly believe the best place to start is with a clean price chart with some crucial levels marked out, and that’s it. Once you can read a chart using price action and S/R levels, your trading will improve no matter what other strategy you decide to use.
Have a look at the chart example below – it’s a classic example of a Forex trader who takes things a little too far!
This Forex trader has created an environment that is not practical, and just too difficult to work with.
There is absolutely no need to over analyze like this – it’s extreme overkill. If your chart looks anything like this – you can fix this right now as a positive step towards better trading.
If you are working with a Forex chart polluted with meaningless horizontal levels, and other unnecessary variables like: trend lines, channels, or even a stack of indicators – making a confident trading call is going to be extremely frustrating.
A badly laid out chart is poison to your trading mind-set. It’s very hard to make logical, rational decisions from confusing data. You endanger yourself to falling prey to your emotions.
The idea is to be minimalistic with the charts and the markets.
In fact, you only need to mark out the significant levels that are surrounding the current price movements at the given time. In some cases we will only have 1 line marked on our charts – as you may have noticed in our Forex market commentary.
You will find in most situations it only takes that ‘one well marked level’ to clearly map out, and help you clearly ‘read the situation’ on a price chart.
Seriously, anything over 3 lines marked on the chart would start to be considered too ‘busy’ and need some cleaning up.
By only marking out the important levels to watch you will keep your charts tidy, simple, and easy to read. This gives clarity back to the chart and to the trader – allowing the identification of good trade setups, and making the anticipation of future price movements much easier.
Understanding support And resistance
Support and resistance levels are proven price areas where buyers and sellers find some form of equilibrium. We generally see a shift in the balance of power between buyers and sellers occur at these levels – this ‘power shift’ generates the classic price reversal patterns we are always on the look out for.
Therefore true support and resistance levels are the major turning points in the market.
Price doesn’t move in straight lines as you are most likely aware of – instead we see price swinging up and down, creating new swing lows, swing highs, or re-testing existing ones.
The more often price does this ‘stop and reverse’ action at a specific level – the ‘stronger’ or more’ significant’ that particular S/R level becomes.
Price is communicating to you that “this price level is being defended aggressively”, and could be a good area to look for reversal signals.
It’s also worth noting that support and resistance levels that are clearly visible on the higher time frames are considered to be greater in value, and have an increased chance of becoming a price turning point.
Just remember; the higher the time frame, the more significant the S/R becomes.
When we draw our S/R levels – we work on the daily time frame the majority of the time.
I recommend using weekly and monthly charts to mark out the more significant or ‘major’ levels in play. These weekly and monthly levels are really good areas to watch out for strong candlestick reversal patterns, like the rejection candle reversal – especially if you’re going counter trend.
Intra-day levels are generally not worth worrying about, price cuts through these like a hot knife through butter on a day-to-day basis and don’t offer much technical value.
This is one of the reasons intra-day or ‘day trading’ is much more difficult and has a very low success rate. You’re definitely trading on a shaky foundation when you ‘hone in’, or tune your analysis on those lower time frames – it’s not worth it.
Working with Support & Resistance in Range-bound Markets
Lets get a little bit more practical and move into some technical demonstrations.
Support is an area on the chart where the market demonstrates strong buying action, easily identifiable by price ‘bottoming out’ caused by bearish price action movement being overrun by bullish pressure at a consistent price horizontal level on the charts.
Support is often referred to as the ‘floor’ that price bounces off, or has trouble moving past to the downside.
Resistance is the opposite of support – it’s where you see price ‘topping out’ as the bullish price action movement is consumed by bearish activity at consistent price levels on the charts.
Resistance is known as the price ‘ceiling’ that the market tends to fall off, or has difficulty pushing through to the upside.
Support and resistance is fairly simple to understand when you look at ranging markets – they make up the major containment lines of range-bound systems.
When a market is range-bound, the only levels you really need to have marked out are the upper resistance ‘ceiling’, and the lower support ‘floor’ of the range.
We recommend to only trade buy or sell signals from these main upper and lower boundaries. Short signals are valid at range resistance, and long signals are to be targeted at the range support.
Trending markets are identified by using swing patterns that are broken down into classic sequences higher highs, higher lows, lower highs and lower lows (not in that order).
These key technical high and low points are called ‘swing highs’ and ‘swing lows’, and it is the order which they appear on the chart is vital to identifying trends, especially if you want to catch them in their early stages of development.
During a bullish trend, price will step upwards in a zig-zag type pattern – almost like price is walking up a flight of stairs. Price will gradually step its way higher forming that ‘staircase footprint’ on the chart.
Higher highs (or swing highs) in bullish trends is where the market finds resistance, and generally starts off a correctional move.
Higher lows (or swing lows) normally are formed after a counter trend correction is terminated, and the market finds its footing (support). Trend momentum kicks back in here and generally pushes price into the next higher high to complete the next phase of the trend.
During a downward bearish trend, the opposite is true.
Notice the ‘staircase’ upward motion – price is finding support and resistance at the swing highs & swing lows, as it moves in the general upward direction.
In trending markets, the critical levels that we recommend to mark, and watch are the ‘Swing levels’ – which is one of the main principles of swing trading.
Swing levels are ‘hot zones’ for price reversals and trend continuation – so they want to have your full attention.
They form when old resistance turns into new support, or vice versa. Basically, the level reverses it’s role from old support to new resistance, or from old resistance to new support. A very important technical event on the chart.
Or if I put it another way – swing levels are when a swing high acts as a new swing low, or an old swing low is used as a new swing high. Study the chart above and you will see each swing level lines up swing highs and lows on the horizontal plane.
Price Action signals that generate off swing levels during trends have a high success rate, that’s why I call them the ‘hot spots’.
There are two main reasons for this; Firstly, there is already trend momentum backing the trade, secondly a swing level – which we know is a key turning point in the trend, adds to the chances that the trade will move in your favor.
Here is an example of a bearish trend and its related swing levels.
In this downtrend we have marked out the swing levels (where old support levels have turned into new resistance).
See how in a bearish trend, the staircase footprint price travels through is inverted to the bullish trend – just think of someone walking down the stairs this time.
The Weekly and Monthly Support & Resistance
On a larger scale, strong weekly and monthly support and resistance levels should be marked on your chart when the current price is the vicinity, or approaching those levels.
These weekly price levels that are dominant from these higher timescales are major turning points in the market, and want to be paid close attention to.
Strong daily price action signals that occur at significant weekly or monthly S/R can be the catalyst for a strong reversal move – and create very profitable trades if you have the discipline to hold a trade open for a longer duration.
In the GBPUSD chart above – you can see how this support level was acting as strong weekly support, and had been a key turning point in this market.
Now because price has broken through this important level – the best course of action is to wait and see if the market will now respect this old weekly support as new resistance.
We can confirm this if a bearish price action reversal signal forms when price retests the old support. It’s all about letting the price action tell you where it wants to go.
Don’t assume something is going to play out the way you think, and take action too early – the market will teach you a harsh lesson for doing that.
In the examples above, we’ve identified the key support and resistance levels on the chart without cluttering up the template with any indicators, trend lines or other chart tools.
Only mark out the important levels that market is currently reacting with at the present time. I don’t think the market cares too much about levels from 10 years ago.
Just concentrate what’s going on in the ‘now’, because support and resistance levels do change over time.
Remember – the market is not static, it’s a dynamic environment. Support, resistance & swing levels will change as the market dynamics change.
By sticking with the levels the current market is respecting, you can keep your hand on the ‘market pulse’, tuning you in to current conditions. Do this and logical, confident trading decisions will flow much easier, so long as you are basing your decisions on what a simple price chart template is communicating to you.
Support and Resistance Take Home Notes
A few points to remember from today’s tutorial…
- Mark upper resistance and lower support in range bound markets
- When price breaks a support or resistance level – mark it on your chart and wait for a signal to confirm it as a new swing level
- During trending conditions – mark higher highs and lower lows and wait for them to be confirmed as a swing level via a price action signal or a price bounce.
- Mark the support and resistance levels on your chart that are dominant on the weekly and monthly chart, but only around the area where current price is located (no need to go back years and years ago).
- Remember the higher the time frame, the higher the significance, the higher chances are of success.
I truly hope today’s guide to identifying support and resistance levels has given you some new insight on how to structure your charts, and plan your trades more effectively.
Don’t expect to nail it immediately just from one pass of this lesson. The ability to draw levels correctly is learned over time and with patience – so don’t give up, learn to avoid common mistakes when traders draw support and resistance.
If you’ve stuck with crowed price charts that are overloaded with a horde of support and resistance levels (and indicators to boot) – then you’re going about it the wrong way. Scrub your chart clean, start again and use the methods discussed here today to keep trading nice and simple.
Acquiring the skill of correctly marking out support and resistance is obviously very important for any Forex trader – but we’ve only scratched the surface here in today’s introduction.
If you’re serious about learning how to read plain price charts to anticipate future price movements, and make high probability trade calls – you would greatly benefit from our war room membership for aspiring price action swing traders.
The War Room is our private membership area where you will learn more about price action strategies, and gain access to advanced ‘war room’ only material – like our 1 hour video presentation on identifying and using support and resistance levels.
There is also the Price Action Protocol course and the community aspect, like the chat room and forum where we are bouncing trade ideas off each other all the time.
I hope to see you on the other side, cheers to your future trading!
The double bottom chart pattern is a bullish reversal price action chart pattern that develops in a down trend and is recognized by the appearance of a low, a rally, and then price revisiting the same zone of the previous bottom. It is much like it’s double top chart reversal pattern cousin except we are doing everything in the reverse. A double top looks for a reversal after an uptrend. Since we are using price action as the main building block of this swing trading strategy, you don’t have to rely on the lagging nature of any technical indicator. Even the entry is done through a breach of the potential resistance level that shows up after the first bottom of the double bottom pattern is put into place. This reversal pattern can be used to show a reversal in the man trend and as an entry pattern for a trade in the direction of the trend and in this case, we look to go long. In the case of the latter, we are trading in the direction of the major trend after the shorter term trend ends with the double bottom pattern. There can be many ways to trade a double bottom chart pattern strategy but like any trading, the important of risk management can never be ignored. Key Elements of The Double Bottom Chart Pattern After a long run of a downtrend, the formation of the double bottom can signify the potential for a complete reversal of the trend. Getting involved at the beginning of an uptrend (picking the bottom) can add to your bottom line in amounts that you can’t imagine. That is best case scenario. The second bottom does not have to come directly to the same price point of the first low that is put in. In fact, a pure double bottom pattern is rare and you will often see price come above the zone or even poke below and then rally. That is a trade setup by itself where traders get trapped short and are forced to cover their position as the uptrend gets underway. The peak that shows up as price puts in the first bottom, starts to rally and then turns back down again is called resistance. The violation of that resistance is what confirms the double bottom. I will repeat that….. A double bottom is not confirmed until the resistance level that forms between to the two lows is violated. Depending on the size of the rally after the first part of the double bottom is put in, waiting for the resistance level to break can end up leaving the trader on the sidelines as a huge move gets underway. You will want to learn other continuation chart patterns such as flags that can show that the double bottom is a likely chart pattern so you can find a trade entry before the resistance is broken. What Is The Swing Trading Strategy We are looking to take advantage of this chart pattern by allowing it to alert us to a possible change in trend. We can even use it to get involved in the longer term trend as the short term downtrend exhausts itself. The market is in a downtrend which can be determined by price action, a technical analysis indicator, or by a simple glance at the chart. We need a downtrend in place. Price bottoms here with a solid rejection and after a quick test of support (not needed), price begins to rally The high is put in and for the double bottom to be confirmed, you will need a break of this level. This is a weekly chart and this peak over a 1000 pips from lows Price moves back down and tests the zone of the previous bottom. We need this zone to hold to have a chance at using our trading strategy to go long Price begins to rally and although not shown on this chart, price retraces to the .786 Fibonacci level (also the same level as that cluster of price above our number 4) and then goes onto a 7000 pip run before stumbling into a long term consolidation. Stops and Price Targets You need to use a stop loss and you can place it below the double bottom pattern as an easy choice. Keep in mind that if you use another entry besides the break of confirmation resistance, a breach of lows does not make this double bottom invalid. You can use an ATR – average true range – stop and that is my preferred method of placing stops regardless of the pattern I am using. One point – the only time I don’t use an ATR stop is when trading a reversal as a violation of the high or low of the retrace or rally would invalidate my trade. Price targets can be set via a measured move in line with the chart pattern. The measured move target is simply the height of the pattern projected upwards which will give you a 1:1 reward risk ratio. The Fibonacci targets simply use extensions which are price projections over 100%. You can also trail your stop to lock in profits with various methods. Alternate Trade Entry You know that the low to resistance area is over 1000 pips and it can be frustrating for a trader to see price move without them. We can use another technical analysis tool, the trend-line, to help us get into this trade Draw a down trend line and enter when price breaks the line. This is a front run of the confirmation entry and remember that you will often see price break a trend line and then retrace to test the trend line. Ensure you have the psychological willpower to sit through the retrace. Trust in the process and your calculated stop loss. Some traders will for watch for a bullish reversal candlestick formation and we do get one on the formation of the second bottom. I would call that a failure test of the lows of a consolidation which is a bullish signal.
Trading with MACD indicator is widely used by Forex traders.Let's take a glance at the very basis of currencies trading with MACD indicator. We will need only MACD indicator with standard settings: 12, 26, 9.Any time frame as well as any currency pair can be used. Entry rules: When the MACD lines’ crossover appears – enter (or wait for the price bar to close and then enter).Exit rules: when MACD lines next crossover occurs. Advantages: very simple approach and can give good profitable entries. Traders may want to change MACD default settings depending on the currency and chosen time frame. For example, traders may test next MACD set ups: USD/CHF MACD (04, 07, 16), EUR/USD MACD (02, 03, 20), GBP/USD MACD (02, 03, 04) for different time frames. Disadvantages: you will need to sit and monitor it again and again. MACD has little use in sideways trading market. It is also never used alone, but rather in combination with other indicators.
Chart Courtesy of StockCharts.com Breakouts can be signals based on price breaking and closing above a declining trend line, horizontal trend line, or a close above previous price range resistance. Once a breakout is entered a stop loss can be placed at the low of the bar of the day of the breakout. If it is going to trend it should not undercut the low of the day of the breakout. If the breakout trends in your favor you could move your initial stop loss from a close below the low of the day of the break to a trailing stop loss of a short term moving average like the 10 day exponential moving average. If the trend continues in your favor you can move up your trailing stop to the 5 day ema, a close below the previous day’s low, or a close back below the 70 RSI during parabolic trends. Breakouts have a lower probability of success as a chart becomes more overbought as measured by the 70 RSI at the time of the breakout. A break and close above the 70 RSI can signal the beginning of a parabolic move. Buying a breakout without understanding where key previous price resistance levels are at in the past on a chart is usually a bad idea as those trapped buyers could still be looking to get back to even by selling into the this strength. Buying breakouts against the current market trend usually does not work. Buying them in the direction of the overall trend has better odds of success. Breakouts in bear markets usually fail, and breakouts very late in a bull market also tend to fail. When you buy a breakout and it fails and falls back through the lows of the previous day, it is time to get out. If the lows of the breakout day are held, there is a good chance of a new range and a new trend. Buying on the anticipation of a breakout before it actually happens is usually a bad idea. You should look for a confirmed breakout for better odds of success even if it leads to higher prices. Better to be late and right than early and wrong. Chasing a break out after a multiple day move is not a good plan. You need a profit cushion to enable a longer term hold and the biggest part of the move can happen in the first few days of a breakout. Buying breakouts in commodities and high growth stocks has a much better probability of success than in big cap stocks or indexes.