Today we are going to explore one of the most important topics when it comes to technical trading – Support and Resistance. Having a thorough understanding of what support and resistance levels are, how to identify them, and how to use them to influence your trading decisions, will drastically improve your results as a trader – no matter what market or timeframe you trade.
I have seen many posts whilst browsing online forums that convey support and resistance in a very complicated and confusing manner. My goal today is to break it down for you into a very simple and easy-to-digest article. I am going to cover what levels of support and resistance are, and why they’re important. I’ll explain an easy 5-step process to drawing support and resistance on any price chart. And I’ll also cover some of the common mistakes that beginner traders make when it comes to support and resistance, as well as how they can be avoided. If you’d rather watch a video (as opposed to reading this post) about Support and Resistance, skip to the YouTube link at the end of this post.
What are Support and Resistance Levels?
Support and resistance levels are specific price levels, or areas, at which there has previously been either a strong supply or demand, resulting in excess pressure from either buyers or sellers with enough force to cause either a disruption or reversal of the prior directional move of price.
Levels that have acted as either support or resistance in the past have a higher probability of doing so again in the future. This is because other traders will already be aware of how price behaved around specific price levels in the past and will be looking to capitalize on similar patterns of price movement in the future.
We can use levels of support and resistance to help us make better-informed trading decisions by using the information that they offer us to ensure the odds are in our favor when implemented as part of a trading strategy.
They offer us information such as areas where buyers or sellers may be more likely to enter the market, they can be used as logical places to enter trades and also as areas of market structure to define stop-loss locations.
How to draw Support and Resistance on a Price Chart
Having support and resistance levels drawn on our price charts will help us identify potential inflection levels in advance and help us structure our trade plans. There are many ways to go about drawing support and resistance levels on a price chart. For the purposes of this article, I have summed up an encompassing way to do this in the following 5-step process.
Before beginning this process, you will need to open a price chart and zoom out to see the range of relevant historical price data. The further away that the historical price data is from the current price, the less relevant it will likely be to your trading today and into the near future.
Step 1: Mark the absolute high and low of the displayed price range.
The high and the low of the price range are important levels to be aware of as they are easily observed by traders using all timeframe charts. Furthermore, the all-time high (or recent high) is generally an important level of resistance that can provide powerful trading opportunities.
Step 2: Mark significant reversal points which were followed by drastic price moves.
For this step of the process, we want to mark the most obvious reversals, ones that were followed by a drastic move in the opposite direction. The reason that we are only marking the most obvious levels is because we want to have the same levels as the majority of other traders. Other traders entering or exiting the market in unison is what creates the effects of support and resistance.
Step 3: Mark levels that have rejected price on multiple occasions.
Levels that have rejected price on multiple occasions are generally going to be quite obvious to other traders and will potentially be observable from multiple different timeframes. Levels that have rejected price multiple times in the past will potentially continue to do so into the future.
Step 4: Levels that have acted as both a support and a resistance.
Levels that have acted as both a support and a resistance are rather important to have marked on your price charts for the same reasons as mentioned before – many other traders will also be aware of them.
Step 5: Levels that have acted as a support or resistance more recently.
The levels that have acted as a support or resistance in the recent past are likely both closer to the current price and fresh in the memory of other traders. These are generally going to be the most relevant levels to your trading today and into the near future.
I’m sure by this point you’re beginning to understand the theme here. We want to mark the most obvious and significant levels on our charts. Levels that are very obvious or significant will be observed by many traders over a variety of different timeframes and are the most likely levels to act as support and resistance in the future. If you would like to watch an example of this 5-step method, check out the YouTube video at the link below.
Common Support and Resistance Mistakes
There are many common mistakes made by beginner (and some more experienced) traders when it comes to support and resistance. I am going to tell you about the most frequent ones that I have observed, as well as how they can be avoided.
The most obvious and frequent mistake that I see is traders having far too many levels drawn on their charts. Some of the charts I have seen posted online look absolutely ridiculous with lines and drawings all over the place. More lines does not mean more profitable. In fact, it likely means more confusion resulting in poor decisions and ultimately less profit than otherwise possible.
The way you can avoid this mistake is quite simple. Only mark the most relevant and most significant levels on your chart. When done correctly, you will only base trading decisions off the most important support and resistance levels, and in turn, you will only take the highest quality trade setups, giving yourself the greatest chances of success.
Another mistake that I see made over and over again is traders treating all levels of support and resistance as equal. Some particular key levels are going to be a lot more significant than others. Levels that are observable across multiple different timeframes and have recently rejected price on multiple occasions are going to be of far more significance than a reversal point from months ago. In my experience, levels that have formed in confluence with either price exhaustion, or periods of unusually high volatility, are good examples of support and resistance levels that are likely going to be more significant in the future.
A way to avoid this mistake is to create a habit of emphasizing the levels which you believe to be of the most significance. The way that I do this in my own charting is by drawing a thicker line to represent more significant levels and a thinner line to represent less important but still noteworthy price levels.
Hopefully, you have found value in this write-up and are able to take away some actionable tips to improve your own trading when it comes to support and resistance.
I encourage you to check out my comprehensive YouTube video on this topic at the following link: https://youtu.be/drsy3wSmGOE
If you have any further questions regarding support and resistance or trading in general, please leave a comment below or direct message me any time, I will respond in due course.