Understanding Support And Resistance Levels

In Today’s Article You’ll Learn:

  • What Is Support And Resistance ?
  • How To Draw Support And Resistance Levels
  • What Are ‘Flip levels’ ?
  • How To Trade Support And Resistance Levels

The concept of Support and resistance is one of first things most traders learn about trading forex.

It’s one of the primary tools you will use to help you in identifying good trading opportunities in the market.

I’ve made this article for beginning traders who have no current understanding of support and resistance, firstly I’ll give you some background as to what support and resistance levels are, then I will detail what you need to look for when drawing the levels on your chart.

The end of the article will give you some ideas as to what strategies you may want to use to trade support and resistance levels.

 

What Are Support And Resistance Levels ?

 

What Is A Support Level ?

I figured we start with learning what a support level actually is.

A level of support is a point in the market where buyers have come in and stopped the market from moving lower.

We don’t know the reasons as to why they have come in and stopped the market falling nor do we need to, the only thing we’re interested in is if the market returns to this level, will the trader or traders who brought before, buy again to stop the market from going down ? because if they do, we can piggy back their trades and hopefully make some money off the resulting up move.

Aviary Photo_130915504887853420

The green line I’ve marked on the chart above is an example of a support level found on the daily chart of  USD/JPY.

You can see every time the market returned to this level it failed to move lower, this means that someone is interested in keeping the market price above this level.

Around 8 times the market failed to break this support level, what this is essentially telling you is the support level seen above is an important place in the market, if someone repeatedly keeps buying to stop the market from going down it means there’s a high chance the market will go up in the near future.

 

What Is A Resistance Level ?

A resistance level is the exact opposite of a support level.

Instead of the market failing to move lower beyond a certain point like in the support level example, its instead failing to move higher.

Someone wants to keep the market from moving higher so they sell to stop it, again we will never be able to know the reasons as to why they want to stop the market moving higher, there’s an unlimited number of variables at play in the market all day long, we need to keep things simple and just focus on how many times the market has failed to move higher.

Aviary Photo_130915511552629747

Here we can see a resistance level on the daily chart of EUR/USD

Each time the market rose to the level it failed to break beyond it, if the resistance level above happens to be broken again at some point in the future then it would become a support level, which I’ll talk more about later.

 

How To Draw Support And Resistance Level’s

 

Many people have difficulty locating and drawing  support and resistance levels.

For a beginning trader, it can be tough to understand how to identify where support and resistance levels are in the market. My goal by the of this section, is to make sure you have a firm grasp on the criteria used for marking the levels on your charts.

Note:

Some people tend to go a bit over the top when drawing support and resistance levels.

Instead of just marking the levels which are close to the current price action they’ll end up marking all the levels they can find on multiple time frames, this can make things very complicated when looking for trading opportunities, its best if you only mark the levels which are close to the current market price this way you won’t get confused as to which levels are which and can concentrate on the levels which are the most important.

 

Marking Resistance Level’s

 

To find a resistance level on your charts your essentially looking for a place where the market has failed to break higher at least two times in the past.

image of resistance level on GBP/SD

This green line shows a resistance level I’ve drawn on the 1 hour chart of GBP/USD.

I could see the market was having trouble moving higher as evidenced by the wicks on the candles below the first two X’s seen on the far left side of the image, after seeing these two attempts fail, I drew a line through the wicks to mark this level as resistance, as I said before there MUST be at least TWO failures in order for a level to be considered either support or resistance.

Also, notice how after the first two failures to break higher every time the market hit the resistance after this none of the candlesticks managed to close above the resistance level.

Later on the market hit this resistance level a total of 6 times ! at least 4 of those hits would have been decent trading opportunities which you could have taken advantage of had you traded them.

 

Marking Support Level’s

 

For a level to be considered support the market MUST have failed to break LOWER across a similar price range at least TWO  times in the past.

image of support level EUR/USD

We use the same method for drawing support levels as we do with drawing resistance levels.

We’re looking for two failures to break lower, when we see this we draw a line through the wicks of the candles and mark the level as support.

In this example our first failure comes on the 13th of October,  this is followed by a second failure which occurred on the 21st.

Once we get that second failure we know this must be a support level because someone keeps coming in and buying every time the market drops to this price zone, our job now is to identify a structure or pattern that we can use to hitch a ride on his trade and hope the market keeps moving higher allowing us to make some money.

 

Support Turning To Resistance – Resistance Turning To Support ( Flip Level’s )

 

Aviary Photo_130916395564785008

The line I’ve drawn on the image above is a resistance level which has become a support level.

The image below shows a support level which has become a resistance level.

Aviary Photo_130915491459123384

When the market breaks a support level, in other words it goes down below the line I’ve draw on the chart, it then becomes a resistance level, so if the market would return to this line and then produce some sort pattern we would sell because now its a resistance level.

Aviary Photo_130914989069132540

Here we have an example of a resistance level becoming a support level.

You can see the market breaks the resistance level without any kind of hint of stopping or failing, this clean break is what you’re looking for when identifying ‘flip’ levels.

The first time the market comes back to the broken resistance level it stops, then moves back up, when this happens the market has confirmed to you this is in fact a support level, at least until the market manages to break below it again in the future, at which point this support level will become a resistance level again.

The reason as to why the levels ‘flip’ is based on the changing psychology of the people in the market.

Professional traders who were selling back when the market was a resistance level now start buying because it’s a support level, it’s easier for them to trade-off a level which already has some prior price history to it than to establish new support and resistance levels in the market.

When the levels change from support to resistance vice versa they do not require another two touches to confirm that it’s a new level, they only require one touch.

Some people will try to trade support and resistance levels on their own without any other kind of analysis or confirmation, it goes without saying that these people typically lose money in the markets.

Expecting the market to just suddenly stop when it reaches a support or resistance level is silly, we need to combine it with other price action concepts to get a rough idea if someone is interested in keeping the market from moving higher or lower.

 

Trading Support And Resistance Level’s

 

This last section will detail how we go about trading support and resistance levels.

Taking trades based off support and resistance level is not difficult once you get the hang the of it, all it requires is some knowledge of different price action patterns which can be found on this site. Now while trading the levels themselves is not actually difficult, what can be difficult (for the trader at least) is being patient while waiting for the market to return to the support and resistance levels they’ve marked on their charts.

 

A Quick Word On Patience

Most people until they start trading with real money are unaware of the psychological skills they will have to learn in order to trade the forex markets profitably.

One of the main skills people are required to learn is the ability to remain patient when waiting for a trading opportunity to present itself.

Being patient is the cornerstone of success in the markets.

You have got to give trades the chance of working out in your favor, this comes from being patient. Many people fail to learn this skill, instead of them waiting for high probability trading opportunities they get bored and start placing trades out of the fact that nothing interesting is happening in the market.

What this inevitably leads to is failed trades which makes them lose money, then they question why they can’t seem to make consistent profits from the markets.

 

A Two Step Process

 

Trading support and resistance levels requires a two-step mechanical process.

The first step is for you to mark all the levels.

The second is to wait for the market to reach the levels you have drawn and then produce a pattern to which you will use to enter your trade.

 

The First Step

 

Time Frame

The first thing we need to do is go onto the daily chart, this is where we will begin our analysis.

Support and resistance levels found on higher time frames have a higher probability of working out than levels found on lower time frames, the problem is the market doesn’t reach these levels often, we need to mark them anyway because when the market does eventually come to a level found on a higher time frame, the resulting movement can be huge, which means we can make a lot of money if we place a trade in the right direction.

We can leave these levels marked on our charts for future reference.

image of support and resistance levels on EUR/USD

In the image you can see I’ve marked 1 support level and 3 resistance levels, notice that each level I’ve marked has been touched multiple times in the past thus making them high probability levels.

Now we need to go onto the 1 hour chart and mark all the levels.

We follow the same process again, we’re looking for levels that have been touched multiple times in the past, the more times they have been touched the better chance we have of them giving us a successful trade.

Don’t bother marking every support and resistance level you only need to mark the levels which are close to the current price action in the market.

Also I suggest you mark the 1 hour levels in a different color to the levels marked on the daily chart, this is just so you don’t get mixed up between which levels are which.

Aviary Photo_130915500512964553

Again we have 3 resistance levels and 1 support level these are the levels you will want to be watching for potential trade setups if you trade during the day.

Once we have completed marking all the levels we can now begin looking for trading opportunities.

 

Step Two

Aviary Photo_130916407044929066

If you look to the left you’ll notice that to begin with this was a resistance level, price came up touched it then moved back down, however, when it rose back to it the 5th time it managed to break through the level, this means that now instead of being a resistance level its become support level.

Remember we would have already had this level marked on our charts by following the first step in the process.

All we have got to do now is wait for the market to return to the newly identified support level and watch for a pattern to occur.

On the 26th the market returns to the level for the first time since becoming support.

We can see a pin bar pattern form with the wick going through the support level, this is a high probability trade I talk more about in my article on pin bars.

After the pin bar forms you’ll notice that the market moves significantly higher over the next few days, even placing a small trade on this pin bar wold of netted you at least £150.00.

 

Summary

Support and resistance levels are one of most commonly used trading tools, if you fail to properly grasp how to use them in the markets you will be at a severe disadvantage, with this guide I hope I have given you enough information for you to start implementing the many strategies which incorporate support and resistance in their analysis of the markets.

You May Also Like:

2 comments

  1. stephen James

    What is the difference between support/ resistance and supply and demand? Are they both interchangeable? I understand that the banks buying and selling produce areas of supply/demand but don’t these areas also become support and resistance?
    I suppose in the end it doesn’t matter what we call them we just need to watch how price behaves as it reaches these levels and make trading decisions based on this information

  2. Alan Murrell

    In your first image under “Step One” (AUDUSD, D1), isn’t the first Resistance line (at about 0.7600) actually a Support line? Price moves away and up from it, rather than away and down?

Leave a Reply

Your email address will not be published. Required fields are marked *