How To Identify Support Lines
Finding out where support lines may be located in the market is simple, all you have to do is mark the points where all recent reversals below the current market price have taken place. Marking these points will make it easy for you to spot where potential support lines lie, because you’ll be able to see where multiple reversals have taken place from similar prices to one another.
Note: The red line represents the current market price.
Just from looking at where these reversals have formed, you can already start to see that some originated from a price close to that at which a previous reversal had taken place from in the recent past. We know that multiple reversals beginning from similar prices to one another below the current market price must mean the existence of support lines, so our next task is to mark lines through the reversals which originated from similar prices, in order to get an idea of how many support lines we can draw from this segment of price action.
You can see that in total there are 7 lines, which basically means there’s 7 potential support lines we can draw in the market. When you draw the lines through the reversals like I have in the image above, you want to make sure that you try to incorporate as many reversals as possible. By that I mean you need to get the lines to touch as many reversals as you can, even if it means going through the body of the reversal candlesticks themselves. In the image you can see some of the lines I’ve drawn do not touch all the reversals I’ve marked, but they do go through most of them, and the ones which they don’t touch are still really close to the lines for them to be considered as being part of the reversals which occurred around these points.
Don’t worry too much about getting the lines absolutely perfect. These lines aren’t the support lines we’re going to use to look for entries into trades, they’re just lines which help us see where potential support lines exist in the market. I’ll show you how to draw the actual support lines in the next section.
Let’s take a look at another example to make sure the process is clear.
As you can see the current market price is above the prices at which these reversals took place. This tells us that whatever lines have formed down here have to be support lines, because they can only form below the current market price not above. With all the reversals marked, the next task is to draw lines through the reversals which occurred at similar prices, so as to get an idea of how many support lines actually exist down here.
Similar to the previous example there are 7 reversal lines in total. The fact there are 7 lines tells us there are 7 possible support lines we can draw from this piece of price action. Again, notice how all the lines I’ve drawn touch the maximum number of reversals which took place at similar prices to one another ? Like the other example some of the lines don’t touch all the reversals, but they do all manage to go through at least 3, so always remember that when you’re drawing your lines make sure they touch at least 3 of the reversals which occurred at similar prices.
If they only touch two, go further back on your charts to find the points where more reversals took place around the same price, and then draw your levels based off where these reversals have formed.