Back To The Basics Of Support And Resistance

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The 7 Types of Support and Resistance You Need to Know

Markets ebb and flow; they go up, they come down and they move sideways. The primary ways we make sense of these movements are analyzing the price action as well as the levels in the market where price bounced higher or rotated lower, we call these levels support and resistance.

Support and resistance levels form the foundation of technical analysis and they help us build a framework from which we can understand the market. For price action traders, support and resistance levels help us plan our stop loss placements and profit targets, but perhaps more importantly, these levels give us a way to make sense of the market in terms of what it has done, what it is doing and what it might do next.

As I teach in many of my lessons, my overall trading approach can be summed up by the acronym T.L.S or Trend – Level – Signal. This lesson is primarily about the L (levels), I discuss the Trend and Signal portion of T.L.S. in other lessons, here are a couple:

In this lesson, we will not just be showing you how to draw support and resistance levels, but we will delve deeper and discuss how to use these levels to find high-probability trades in range-bound markets, determine trends, define risk & targets and more. I hope you enjoy this lesson and refer back to it often, as it is jam-packed with helpful explanations and examples…

The 7 Most Important Types of Support and Resistance & How to Use Them…

  • Traditional swing highs and lows

Perhaps the most important support and resistance levels are traditional swing highs and lows. These are levels that we find by zooming out to a longer time frame, typically the weekly chart or possibly even monthly. This is where we get a ‘bird’s eye view’ of the market and the major turning points within it. What we want to do is simply identify the obvious levels that price either reversed higher or lower at and draw horizontal lines at them. These levels do not have to be ‘exact’, they may intersect price bars or they may be zones rather than exact levels. You can consider this the first step in regards to support and resistance levels and it’s the first thing you should do when analyzing any chart.

Notice the ‘bird’s eye view’ we get by zooming out to the weekly time frame. Here we can identify major support and resistance levels, trends and trading ranges…

Next, we want to zoom down a time frame, to the daily chart, to ‘fine tune’ our levels some more. The daily chart is the primary time frame for finding trade setups, so it’s important we understand the broader picture on the weekly chart but also that we have identified the shorter-term levels on the daily. I have a good video on this topic of mapping the market from higher time frames to lower, be sure to check it out. One key point to remember is that when you zoom into the daily or even the 4 hour or 1 hour, you always leave the higher time frame levels on your chart as they are very important.

Notice, by zooming into the daily chart from the weekly example above, some of the same weekly levels are still in play as well as some new shorter-term daily chart levels we couldn’t really see on the weekly…

  • Stepping swing point levels in trends

Have you heard the saying “Old support becomes new resistance and old resistance becomes new support”? This is referring to the phenomenon of a market making higher highs and higher lows or lower highs and lower lows, in an up or downtrend. We should mark these ‘stepping’ levels as they form, then when the market breaks down or up through them we can look to trade on retracements back to those levels, also known as trading pull backs. This also gives us a way to map the trend of a market – when you see this stepping phenomenon you know you have a solid trend in place.

These levels are good entry points as well as points to define risk or stop loss points. You can place your stop loss on other side of these levels.

For example, in the chart image below, we see a clear downtrend in place. As price broke down past the previous support level, that level ‘flipped’ to resistance levels that act as high-probability entry levels if price retraces back up to them.

  • Swing point levels as containment and risk management

We can look to sell or buy at swing points even if they are not part of a trend. Markets spend much of their time consolidating and in trading ranges, so we should be able to find trades within those market conditions, not only in trends.

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We can simply use the most recent swing high or low as a risk point to define our next trade, which you can see in the chart example below.

In the image below, notice that price broke lower, down through support, then it stayed contained under that level, which was then acting as resistance. We could look to sell at that level or just below if price stayed contained below it. In this way, that level is defining where we will look to take our next trade and we know if price moves beyond that level our trade idea is invalid, so placing our stop loss just beyond that level is obvious. We can also use recent swing points as profit targets. In the example below, notice how we could use the recent swing lows as profit targets.

  • Dynamic support and resistance levels

Next, let’s talking about dynamic support and resistance levels. What I mean by dynamic is moving levels, in other words, moving averages. A moving average moves up or down according to what price is doing, and you can set it to consider a certain number of bars or time periods.

My personal favorites are the 21 and 50 period EMA or exponential moving averages. I like to use them on the daily chart time frame mostly, but they can also be useful on the weekly charts. These ema’s are good for quickly identifying the trend of the market and for joining that trend. We can watch for price to test the moving average after breaking above or below it, and then look to enter at or near that moving average. Ideally, the market will have proven itself by testing the level and bouncing previously, then you can look to enter on that second retrace.

Here is an example of the 50 period EMA being used to identify a downtrend as well as find entry points within it. Ideally, we will look for a 1 hour, 4 hour or daily chart price action sell signal as price nears or hits that level on a retrace back up to it in a downtrend like this…

The 21 period EMA can be used in a similar manner as we see below. Keep in mind, the shorter the EMA period the more frequently price will interact with the EMA. So, in a less volatile market you may wish to use a shorter period ema like the 21 rather than a longer one like the 50.

  • 50% Retracement levels

Whilst I don’t use traditional Fibonacci retracements and all their many extension levels, there is a proven phenomenon that over time, markets often hold the halfway point of a swing (circa 50 to 55% area), where market makes giant moves, retraces, then bounces in original direction. This is partly a self-fulfilling event and partly just a result of normal market dynamics. To learn more, checkout this lesson on How I Trade 50% Retracements.

Look at this example chart showing a large up move that retraced approximately to the 50% level on two different occasions, providing a very high-probability entry scenario, especially on the second bounce…

  • Trading range support and resistance levels

Trading range support and resistance levels can provide many high-probability entry opportunities for the savvy price action trader. The main idea is to first identify a trading range, which is basically just price bouncing between two parallel levels in the market, and then look for price action signals at those levels or look to fade the level on a blind entry. By fade the level, I mean if the market is moving up and at the key resistance of the range, look trade the opposite way, i.e. sell. Or, you look to buy the support of the range. You can literally do this until price clearly breaks and closes outside of the range. This is a MUCH better approach than the one most traders take in trading ranges – trying to predict the breakout before it happens and constantly getting whipsawed as price reverses back into the range.

Note, in the example image below, we had a large trading range as price was clearly oscillating between resistance and support. We could have entered on the second test of resistance (short) or on the second test of support (long) either blindly or on a price action signal like the pin bar signals we see at the support below.

  • Event area support and resistance

The final type of support or resistance we are going to discuss today is event areas. Event areas are a proprietary form of support and resistance that I expand on in detail in my price action trading course, but, for now, let’s make sure you have a good basic understanding of them.

Event areas are key levels in the market where a major price action event occurred. This can be a big reversal or clear price action signal either of which led to a strong directional move.

In the example chart below, you can see a clear event level that was formed after a strong bearish reversal bar on the weekly chart (there was also a large daily chart bearish pin bar there). As price approached that level on a retrace some months later, we would have wanted to be sure to have that level on our charts as it was a strong level to look to sell at either on a blind entry or on a 1 hour, 4 hour or daily chart sell signal.

Conclusion

I hope you have enjoyed this support and resistance tutorial. We have gone over the major types of support and resistance and how I use them as indications of market condition (trending or range bound), levels to look to buy or sell from, levels to define risk and as a framework to understand what the market has done, what it is doing and what it might do next. When you combine a solid understanding of support and resistance levels with price action and market trends, you have the triumvirate of trading: T.L.S, which you can learn much more about in my Price Action Trading Course.

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Rest For Resistance

Next World Tarot: The High Priestess by Cristy C. Road

As a bipolar woman in recovery, learning how to develop and maintain self-care is an everyday struggle. It’s something I work hard to practice everyday, and I celebrate myself as best I can when I complete the arduous task of taking care of myself.

So here are a few self-care principles I live by and offer to you:

Practice the basics – Eat, sleep, bathe and go outside. These actions may be simple for many, but for those of us who live with mental illness, they can be a struggle. When I can complete my morning routine of getting out of bed, having my morning coffee and cig, medicating and feeding myself and my animals, I know a functional day is possible.

Take a break from the world – Some days, I need to zone out and tap into solitary self-care. I watch a few movies, knit, make jewelry and fight the guilt of just taking it easy. If you need some time to put down work and check out from life, then take it. Know that you are restoring your energy for the challenges of life.

Find a supportive community – Surrounding myself with friends who understand and support me in my struggles is how I keep going. Whether it’s a quick coffee with a friend or a phone call, I’m able to share what’s going on with me, and lend an ear to the people I care about. That connection keeps me from falling into self-pity and doubt. It provides me with encouragement to continue my self-care journey.

Tap into your creativity – When I write, I fulfill my purpose. Sing, dance, act, make art and collaborate. Do whatever you feel expresses who you are to the world. The feeling of creating something that comes from your heart is priceless.

Seek peace and calm – In seeking everyday wellness, I call on my spiritual practice to find quiet. I meditate, pray, read, listen to music, and take walks. I conjure up the moments that help me find quiet to hear my inner voice and listen. Seeking peace and calm helps me to better understand myself and formulate how I decide to be guided.

Rest – Let’s be real, wellness is tiring. Take naps, sleep well, and slow down your body to take much-needed breaks.

Fight – Never give up on yourself and your right to self-care. When I learned I had to care about myself to care for myself, it was a hard pill to swallow. So I faked feeling worthy until feeling worthy started to become a natural response to my everyday life.

As a Queer Black woman, I live in a world that gives up on me, daily. I refuse to give up on myself in response. I advise with all the sisterlove in my heart that you never give up on the self-care you rightfully deserve.

Editor’s Note: If you need further advice on ways to practice forms of self-care, please visit the QTPOC Mental Health group, a place on Facebook for queer & trans people of color to connect with and help one another. Or, seek out an online group that meets your own intersectional needs.

Back To The Basics Of Support And Resistance

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 piggy backing off of someone else’s opinions, you will never truly get there. So today, I am going to show you the processes I user to mark out 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.

SUMMARY

Traders kill their trading at the very core by making a mess of their charts. There is no need to have too much going on, prioritize your support and resistance levels so only the really important ones are marked. This will help keep your chart clean – by doing this you eliminate self-sabotaging confusion and promote high precision trading.

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.

SUMMARY

Support and resistance are horizontal levels the market has used in the past as a turning point on the chart. They can be found on all time frames, but are best sourced from higher time frame charts, such as the daily and weekly. The higher you go up the time frames, the more data inside the candles – therefore the more significant the levels become, and are more likely to act as a turning point in the future.

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.

SUMMARY

Ranging markets are really easy to ‘map out’ on your charts. You need to draw your levels so that you highlight the upper resistance and lower support containment levels. These are the major turning points for a range and deserve your attention. The best trading opportunities will form here. Stay away from the middle of the range, it’s a ‘no fly zone’ that spawns a lot of bad signals and rough price action

TRENDING MARKETS

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.

SUMMARY

Trending markets rarely move in a straight line – instead they ‘walk’ up, or down the chart leaving a ‘staircase looking footprint’ as price swings from highs and lows, but still moving in an overall dominant direction. During trending markets it’s the swing levels that are most important to have mapped out on your chart, because they are the critical turning points in a trending environment, which I call the hot spots of a trend.

THE WEEKLY AND MONTHLY LEVELS

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.

SUMMARY

Weekly levels are major reversal points in the market. Watch for any approaching weekly, or monthly support or resistance and mark them on your chart, so you can pay special attention to them and watch for any strong reversal signals. Very lucrative trading opportunities can develop from these levels if you’re willing to hold your trade.

TAKE HOME NOTES

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.

what we want: 1 + 1 + 1 + 1 + 1 + 1 + 1 + 1 + 1 = 9
what market delivers: 1 + 2 + 8 + 7 – 4 + 0 – 5 + 8 – 4 – 5 + 1 = 9

Failure is success in progress

Dr. Alexander Elder : successful trading should be a little bit boring .

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