Support And Resistance
Support and resistance are the most widely used methods to hunt for buying or selling opportunities on the markets.
Support and resistance levels are not exact.
Frequently you will see a support or resistance level that is about to break/appears broken, but more often than not you find out that the market was just testing it.
Reading on the internet, you are taught to plot support & resistance levels, like this:
Resistance: the highest highs / recent highs on the chart that you can imagine there was plenty of interaction between the buyers and sellers.
Support: the lowest lows / recent lows on the chart that shows a bottom of the chart between buyers and sellers.
However, the actual way to find support and resistance levels are at their closes. We will demonstrate the differences and how to draw them shortly.
The main reason why people focus on support & resistance is that these areas show when buyers/sellers have had a large impact on the price and have either reversed or continued the price action.
Here is an example of real resistance levels and false resistance levels:
You can clearly see the difference, albeit a matter of pips. However, every pip counts if you want to generate accurate trading ideas frequently.
What are support levels
Support levels are subject to every trader, however, it is easy to pick out stronger support levels.
Support levels are areas of the market where the price has tried to go down but reversed.
These are important levels because if the support level is untested, there is a good chance that price may penetrate and continue further down.
Whereas support that has been tested a couple of times suggest it is stronger and is likely to reverse again and hold the support level – hence the name support level.
Support levels are plotted after the price action but help us predict future movements.
Below we have demonstrated several support levels.
As you can see price reacted at these levels then either continued back upwards or penetrated lower.
What are resistance levels
Resistance levels are the same as support levels but price reverses after the price has tried to go higher.
We look to add resistance lines when the market trades upwards and then pulls-back.
One thing to note is that when price closes above a resistance level it turns to support; when price closes above a support level it becomes resistance.
Here is an example of a Resistance becoming Support
Can you see how the resistance, once the price closed above the line, was then retested a few hours later. The resistance level then became our support level, which held strong.
How to draw support and resistance levels (accurately).
This is super easy, quick, and miles better than what is taught on the Internet.
The main issue is that the most common knowledge with drawing support and resistance levels is that they must be drawn at an area that looks like there was resistance in a price moving upwards and downwards.
However, this method is hit or miss. Plus you can end up with too many levels that don’t mean much at all.
This is the simple step-by-step guide to drawing resistance and support levels easily and accurately.
Step 1 – load up your chart
Step 2 – Change to the Line Graph chart view
Step 3 – Draw horizontal lines at the peaks of the lines. There must be 2 peaks or more to qualify as resistance. The more peaks that are at the same level or as close as possible, the stronger the resistance level. You want to join the Tops up as closely as possible.
Step 4 – Draw horizontal lines at the troughs/bottoms of the lines. There must be 2 troughs/bottoms or more to qualify as support. The more troughs/bottom points that are at the same level or as close as possible, the stronger the support level. You want to join the bottom points up as closely as possible.
Step 5 – Return back to the candlestick chart
That is it, by doing that technique you will have more accurate support and resistance levels available to you. Which will help you make more pips.
What is the logic behind this?
Simply down to the line chart shows the closing price easier. This is the last buying or selling decision made during that candlestick which defines the final sentiment back at that candlestick.
When price penetrates and closes above the resistance, that shows that buyers are willing to take the price higher.
When the price penetrates and closes below the support level, that shows the sellers are willing to take the price lower.
Also, you will notice that price reacts accurately around these methods.
Let’s have a look at how the resistance and support levels react with one another.
As you can see price movement reacts well with these levels.
How cool is this?
Why not give it a try on a demo account.
How To Trade Support and Resistance Levels
Amateur retail traders commonly set their pending orders at support or resistance levels and wait for it to get triggered.
This is a huge mistake as it opens you up to several different scenarios that can eat away your trading positions.
As you now know, the price needs to test these levels of support and resistance and if you are placing an order on the price that needs to be tested, you’ll be wrong more than right.
How do we prevent this?
We simply wait for the price to touch the support or resistance level and see what happens.
If the price touches the resistance level and pulls back, then we can short the market.
If the price bounces from the support level, we can buy the market.
Long/Buy Support Level Bounce
Entry – High of the previously rejected price candlestick
Stop Loss – low of the previous price candlestick
Take Profit – Next Resistance Level
Step 1: wait for the market to pull away and retrace from our support level
Step 2: When the following candlestick closes, if it retracts away from the support level and is a green candle, then enter a trade on the previous candlestick’s high. Add the stop loss to the previous candlestick’s low.
Step 3: Set a take profit at the next resistance level.
In the example above, you would have gained over 60 pips profit!
Short/Sell Resistance Level Retrace
Entry – Low of the previously rejected price candlestick
Stop Loss – high of the previous price candlestick
Take Profit – Next Support Level
Step 1: wait for the market to pull away and retrace from our resistance level
Step 2: When the following candlestick closes, if it retracts away from the resistance level and is a red candle, then enter a trade on the previous candlestick’s low. Add the stop loss to the previous candlestick’s high.
Step 3: Set a take profit at the next support level.
In the example above, you would have gained over 45 pips profit!
This is the method that is most commonly used by professional traders as it provides clear validation that the markets want to continue in the direction with strong momentum.
The breakout occurs when the price penetrates the support/resistance level and continues in the trading direction.
There are two methods to trade the break of a support/resistance line.
Method 1: Breakout Confirmation
The simplest way is to buy or sell whenever price strongly penetrates through a support or resistance level.
We want the price to cut through the resistance/support level as if it was never there.
This gives us a clear indication that the momentum is in the buyers/sellers direction and it would be a smart time to open a position.
Like the Retrace method, we still do not have our orders directly on the resistance/support level.
We would place our orders slightly below the support level or slightly above the resistance level.
This is subjective for all traders, as long as the orders are not on the actual support/resistance level. You can see in the example below.
In this particular case with trading the breakout of a resistance level, we want to wait for a candlestick to close ABOVE the resistance line. Then we can apply our execution rules to enter the market.
How to trade a support level with a breakout confirmation
To trade support levels you must do exactly the same as resistance levels but in reverse.
So you must wait for a candlestick to CLOSE BELOW the support level for validation, then use the trade execution rules to enter the trade.
Method 1 is super easy to learn, and we will go into more detail about breakout trading later on in this course.
This type of trading will be fundamental to your success as this will add confluence to your trading decisions.
The key rules to trading this method is:
- Make sure you draw the support/resistance levels accurately as showed before.
- Make sure that the candlestick CLOSES above the resistance level or below the support level.
- Make sure you follow our exact execution rules taught before.
- Execute the trade ONLY if the candlestick’s high/low has been broken
Method 2: Pullback Confirmation
This is a conservative method and is used predominantly on weaker support/resistance levels.
The idea is to wait for the support/resistance level to get broken, then wait to see if the market retraces and tests the previous support/resistance level.
If the market retests and then breaks the support/resistance level, then we just avoided a fakeout (false breakout).
If the market bounces back off the previous support/resistance level and continues in the direction, then we will place an order in the market in these two areas:
Pullback Confirmation – Long/Buy
Buy – At the high of the previous pullback
Stop Loss – High of the lowest pullback candle
Take Profit – Next Resistance Level
Step by step walkthrough
Step 1: Price broke out of the initial resistance line.
Step 2: The price then retraced back towards the previous resistance
Step 3: The previous resistance is now a support level
Step 4: The market pulled back and hit our support level perfectly then pulled away. This is our pullback candlestick.
Step 5: Enter on the pullback candlesticks high, set stop loss on the candlestick’s low.
Method 2: Pullback Confirmation
Pullback Confirmation – Short/Sell
Entry – At the low of the previous pullback
Stop Loss – High of the highest pullback candle
Take Profit – Next Support Level
In this example, it highlights how important the execution rules are as discussed in the previous topic.
As you can see by waiting for the pullback to occur, we managed to take a second bite out of the apple and make some pips.
Never buy into resistance – this means as price reaches the resistance level, do not buy INTO it. We taught you two methods that occur AFTER price has reacted with the resistance level.
Never sell into support – this means as price reaches the support level, do not sell INTO it. We taught you two methods that occur AFTER price has reacted with the support level.
Remember this and the odds of success will increase in your favour.
If you combine candlestick patterns with these techniques, you can look forward to some explosive trading opportunities.