Support and resistance levels are one of the most important things you can learn as a forex trader.
By pinpointing key support and resistance levels, traders can find the right moments to enter and exit a trade.
But what are support and resistance levels?
Support and resistance levels are defined as price areas where the price will not go any higher - resistance - or any lower - support.
Using support and resistance is very useful because it can be used in all market situations; bull, bear or ranging.
In this article, we’re going to we’ll explain how to draw support and resistance levels and how to trade then effectively.
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How to draw support and resistance levels
The first thing traders need to master to trade support and resistance levels is to draw them correctly on charting software.
If you don’t do this correctly, you will not be able to trade support and resistance.
That said, finding and drawing support and resistance levels is relatively easy and shouldn’t take you too long.
First, you need to zoom out on your charts so you can see the bigger picture, this makes it a lot easier to see support and resistance levels. About 10 scrolls of the mouse should be enough.
Draw your lines on the most obvious levels, the ones that are clearest to you. If you’re not sure it’s a level, don’t draw it.
Don’t draw too many lines
Too many lines can get very confusing. Where do you want to buy and sell? If there are too many lines, you can’t tell.
We repeat this a lot at Trading Education: Keep your trading plan simple! And support and resistance trading should also be very simple.
Too many lines can cause also analysis paralysis which can prevent you from trading. Keep it clear and simple and you will be able to trade much better.
Keep to about five or six levels at the most, no more.
After this, adjust the lines you have added so they get more touches throughout out the chart. You may find that when you do this, you find more levels.
When adjusting the lines, focus more on capturing the more recent touches as they are more correct, earlier touches are less important.
Don’t put your lines at the extreme lows or extreme highs, as these are not support and resistance levels. You are only looking for the most touches only.
And don’t put your lines where the price slices through. You want touches, not the price going above or below the price.
If you’re doing it correctly, it shouldn’t take you too much time. Perhaps not more than a minute.
Remember, don’t use the same support and resistance levels every time you trade. You should be drawing new lines every so often.
Delete old lines and draw new lines whenever necessary.
Day traders should also only focus on today’s support and resistance levels, not on prior days as this is often too much information.
Major and minor support and resistance levels
Not all support and resistance levels are the same.
Some levels can be labelled as minor and others can be labelled as major. Minor levels are more likely to be broken while major levels are more likely to hold.
How to trade support and resistance
Put quite simply, you ideally want to buy when prices are low, around support levels and sell near resistance levels.
But there are several key things traders need to take into consideration to be more effective.
For starters, the stronger the movement, the more traders will get involved. Look for big movements which are usually characterised by a large series of candles.
You want to get involved in that action. What you don’t want to do is get involved in small market movements.
Trading in a ranging market can be a little more difficult as the gap between support and resistance can be closer.
Another important thing to note is that resistance levels can become future support levels and vice versa.
To truly make a profit from trading support and resistance levels, you want to trade market breakout. This where the price jumps out of resistance levels, ideally soaring past them.
What you want to see is higher lows into resistance. What this means is the price of the currency pair is slowly trending upwards, step by step.
It will go down at points, but generally speaking, the price is on the rise. When this is happening, the sellers are getting weaker and the buyers are getting stronger.
You also want to be on the lookout for lower highs into support. This is the exact opposite to the above.
If the currency pair is declining in price. Sellers are getting stronger and buyers are getting weaker.
What higher highs or lower lows tells us is that the market may break out at some point soon, either above or below.
But remember to wait for a breakout move, a strong move which will act as confirmation to trade. The market is capable of anything and it may not work out as planned.
Look for triangle patterns
A good thing to look for is candlestick patterns. These can help a lot when trading support and resistance and give you more confirmation.
A series of lower highs and lower lows into a triangle pattern approaching support levels may be a sign that the market is about to get lower.
Ideally, you shouldn’t trade at these points. However, this doesn’t mean that it cannot break out higher.
The reverse is also true. If a triangle pattern is emerging with higher highs and higher lows, it can mean that a breakout can occur. Again though, look for confirmation before you act.
You should also look for patterns such as the hammer or inverted hammer near support. When this happens, a downtrend is likely to form into an uptrend.
Similarly, a shooting star doji close to resistance levels may mean an uptrend is about to become a downtrend.
Stop losses and take profit orders
Utilising stop losses and take profit orders can make trading support and resistance a lot easier and safer.
Ideally, you want to place a stop loss a few pips below support. This way, if the price dips below support, you won’t get stopped out.
The same is true with resistance; put your take profit order slightly above resistance levels.
An important thing to note about support and resistance levels is that they are areas, not exact numbers.
The market has a habit of going beyond the price you will likely expect.
So, if you are aiming for a price of $5, don't be surprised if it dips lower to $4.95 or higher to $5.10, for example.
Support and resistance levels are not an exact science, they are a guide. That is why giving space to your stop loss and take profit orders is advised.
Do not put stop losses or take profit orders exactly on your support and resistance lines.
Using channel patterns
A channel pattern is a tool that is available on most charting software. They allow you to draw support and resistance levels on top of your charts in the form of a tunnel or a ‘channel’.
One advantage that they have over generic lines on charting software is that they do not have to be horizontal lines, they can be rotated to be ascending or descending.
This is highly useful because it allows you to see support and resistance in a trending market, upwards or downwards.
Have a plan in mind
Don’t just enter a trade blindly when trading support and resistance.
However you trade support and resistance, keep your trading plan simple. The more elements involved the more likely things will go wrong.
When you enter a trade, you should have an idea of when you are going to exit. Set a target for a certain amount of pips that is realistic.
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If you remember anything from this article, make it these key points.
- Drawing areas of support and resistance shouldn’t be too difficult. Draw about five or six lines that are easy to see, it shouldn’t take you more than a minute.
- Always look for confirmation before making a trade. This can be in the form of a movement in the direction you want or in the shape of candlestick patterns.
- Consider using channel patterns. These can be used when the market is trending to show support and resistance.
- Have a plan in mind. Don’t just trade support and resistance alone, look for confirmation and have an idea of when to exit the trade.
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