Nearly every single technical trading system will rely on you the trader having the ability to correctly draw support and resistance levels on your chart. Mapping out support and resistance is really the most important core skill any serious traders will need to have a good grasp on. If you can’t draw your support and resistance then your trading as a whole will implode on itself.
Something that is built on a weak foundation will eventually crumble
It’s really important you master the skill of identifying support and resistance level to build a good foundation for your success as a trader. The issue most traders have with the whole process is they tend to over complicate it all and are just left with a very messy, confusing, hard-to-read chart. Sound familiar?
In this article we will give you a good idea on how easy it is to keep your charts clear and using a simple approach. We’re going to start from the beginning and talk about how to identify support and resistance levels that actually matter and the ones that don’t.
I mentioned the dangers of building your trading on a weak foundation alright. Let me extended on that analogy.
An architect draws up plans for a new building. But he graffitied the blueprints with scribbles and smudge marks, making it barely readable. The actual builder who has to work off those designs is going to have a very difficult time constructing the building the was it was meant to be. The same analogy applies to your trading. If you are working with a chart polluted with meaningless support and resistance level, and other unnecessary variables like an excess of trend lines, or even indicators. Making a confident trading call is going to hard, stressful and make you suffer anxiety attacks.
Take a look at a chart I found below…
A quick search of the forums and it didn’t take me long to find traders posting up charts littered with support and resistance lines that are way overdone. Instead of keeping things straight forward and simple, this trader has gone overboard and created an environment that is impractical and just down right too difficult to trade in. There is absolutely no need for this and is extreme overkill.
Most traders believe that support and resistance mapping is meant to be a hard or complicated process, when it’s actually not. Some traders also believe they have more of an ‘edge’ or ‘insight’ into the market if they market out as many lines as possible, again far from true. So what I am essentially saying here is that you don’t need to go crazy with marking out support and resistance levels, in fact you only need to mark out the significant levels that are surrounding the current price movements. In some cases we will only have 1 line marked on the chart as you will often see in our market commentary, and that’s all we will need to correctly map out the situation on the charts. Seriously, anything over 3 lines marked on the chart would start to be considered too ‘busy’. By only marking out what is necessary you will keep your charts tidy, simple and easy to read. This gives the price action much more clarity and makes identifying important price movements much more obvious.
So what is support And resistance?
Support and resistance levels are proven price areas where buyers and sellers find some form of equilibrium and generally a shift of power between buyers and sellers occur that creates the ‘price reversal’. Therefore Support and Resistance are the key turning points in the market. Price doesn’t move in straight lines as you are no doubt well aware of. Price swings up and down, creating new swing lows, swing highs or re-tests 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.
It’s also worth noting that S/R that are more obvious on the higher time frames are considered to be higher in value. The general rule of thumb is; the higher the timeframe you work with the more significant the S/R becomes. When mapping out S/R lines we work on the daily time frame as an absolute minimum. 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 to watch out for strong candlestick reversal signals, like the pin bar reversal.
Intraday levels are generally not worth worrying about as price can cut through these like a hot knife through butter. This is one of the reasons intraday or ‘day trading’ is much more difficult and has a very low success rate. You’re trading on a shaky foundation when you ‘hone in’ on those lower timeframes, it’s not worth it.
Let’s get a little more specific…
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 point on the charts. Support is often referred to as the ‘floor’ that price bounces off, or has trouble moving past.
Resistance is the opposite of support, its where you see price ‘topping out’ as the bullish price action movement is met with overwhelming bearish activity at consistent levels on the charts. Resistance is known as the price ‘ceiling’ that the market falls off, or has difficulty pushing through.
Support and resistance make up the major boundaries of ranging markets, when a market is range bound the only levels you really need to have marked out is the upper resistance ceiling and the lower support floor of the range. We recommend to only trade price action signals from these 2 levels, short signals at range resistance and long signals at the range support is what we look for in price ranges.
Trending markets are identified by using swing points patterns, broken down into higher highs, higher lows, lower highs and lower lows. These key points are called swing highs and swing lows and the order they form in can help identify trends, especially in their early stages.
During a bullish trend, price steps upward in a zig zag type pattern. Price will gradually step its way higher forming a staircase look on the chart. Higher highs (or swing highs) in bullish trends is where the market finds resistance, then higher lows (or swing lows) is where the market finds its footing back on support for trend momentum to kick back off from and move into the next higher high. During a downward bearish trend, the opposite is true.
Notice the staircase type zigzag upward motion – price is finding support and resistance at the swing highs and swing lows as it moves in a general upward direction.
In trending markets, the key levels that we recommend to mark are the ‘Swing levels’. These are the areas of the chart where old resistance turns into new support or vice versa. Price Action signals that form off swing levels during trends have a highest success rate because 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 favour.
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).
To summarize; during trending markets it’s the swing levels that are most important to have mapped out on your chart because they are the key turning points in a trending environment. During range bound conditions it’s only vital to have the upper resistance and lower support marked out as these are the key areas of interest during ranges.
The Weekly and Monthly Levels
On a larger scale, strong weekly and monthly should be marked on your chart when current price is the vicinity of them. Support and resistance levels on this timescale 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 move and a very profitable trade.
In the GBPUSD chart above, you can see how this support level marked was acting as strong weekly support and had been a key turning point in this market. Now 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.
As you can see in the examples given that we’ve identified the key support and resistance levels in the market without cluttering up the chart with mess. Like I said before you only need to mark out the important levels that market is currently reacting with at the present time.
No one cares about S/R 10 years ago, just concentrate what’s going on in the ‘now’ because support and resistance levels do change over time. The market is not static, it’s a dynamic environment. Support, resistance & swing levels will change as the market changes. By marking only the levels the market is respecting at the present time keeps you in tune with market dynamics and make it a much easier task to make clear, logical trading decisions.
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 with a price action signal or price bounce.
- Mark the support and resistance levels on your chart that are prominent on the weekly and monthly chart, only around the area where current price is located.
- Remember the higher the timeframe you mark your levels from the higher the significance which gives trades that form off the higher significant levels a higher chance of success.
I truly hope todays beginners lesson on support and resistance has given you some new insight on how to structure your charts and plan your trades more effectively. The ability to draw support and resistance correctly is learned over time and patience, so don’t give up. If you’ve got a chart that’s loaded up with so many lines that you don’t even know what you’re looking at anymore, then you’re doing it wrong.
Acquiring the skill of marking out support and resistance is super important for any trader because it’s the backbone of any trading system you come across. We’ve only scratched the surface here today, but we extend on today information in our article about Forex swing trading. If you’re serious about becoming a professional trader and would like to learn more about using plain price charts with support and resistance. Tou would greatly benefit from our war room membership. The War Room is our private membership area where you will learn how to trade with price action professionally, and have access to advanced material like our 1 hour video presentation on identifying and using support and resistance levels. Plus more.
I hope to see you on the other side, cheers to your future trading!