> “Support and resistance levels are two concepts in technical analysis that you cannot ignore. Regardless of what markets you are trading, if your approach to trading is based off technical analysis, then support and resistance levels are something that you cannot avoid. While there are many automated tools to assist you in drawing the support and resistance levels, understanding how to identify these levels can greatly work to your benefit. Drawing support and resistance levels requires a bit of subjectivity. But at the same time, you can expect these levels to be clearly seen among a lot of traders. In this article, we give a basic outlook on how you can look at the price chart to draw the support and resistance levels. The only way to become good at technical analysis is by practicing how these levels work and knowing how price usually behaves as it approaches the support and resistance levels.”
Support and resistance as you have learned previously are two simple but important concepts when it comes to trading. Support and resistance, or supply and demand are price levels based on the markets.
When there is an interest among investors to buy an asset, the price starts to rise due to increased demand. At the same time, when there is less interest in the asset, the price of the asset starts to fall.
Prices move among levels of support and resistance as they bounce back and forth. In some cases, you might find price to completely ignore these levels. This happens when there is a strong buying or selling interest in the asset.
As a trader, it is important to understand support and resistance. Knowing how and where to plot support and resistance levels is important as it can help you to understand price better.
Support and resistance, is something that is common to all markets and not just the forex markets. Therefore, having a sound foundation about support and resistance can help you in the long term.
How to draw support and resistance?
The first step is to look at the price chart. Observing price, look to areas where price has made a strong reversal in the direction. Of course, prior to this, you should ascertain the trend in the markets.
In an uptrend, the support and resistance levels tend to move higher, while in a downtrend, you can expect the support and resistance levels to move lower. Keeping I simple, look at the price or the areas where you see that there has been a reversal.
Once you identify this area, using the horizontal tool, mark those price levels.
One of the important things to remember about support and resistance levels is that as price evolves further, they become not so relevant. Therefore, support and resistance levels constantly shift along with price.
Furthermore, support and resistance levels also change. A support level that has been breached can turn into resistance and likewise, a resistance level that has been breached and turn to support.
The best way to illustrate this is with an example. Let’s look at the chart below.
Example of support and resistance
The rectangle areas on the chart represent the support and resistance levels. The dotted lines show minor support/resistance levels while the thick horizontal line shows a support level of a different kind.
As you can see from the above chart, the support and resistance levels are plotted based on observing price from the left side of the chart. When you see a key reversal in price direction, you can expect price to form a support or a resistance level there.
Ideally, a support or a resistance level is drawn when there is at least two tests of the levels. The first resistance level from the top shows how price tested the level twice before falling back.
This validates the resistance level strongly.
Similarly, the lower rectangles show the support level which has been tested quite a few times. But notice that price drops below this level and rallies back. There is a high likelihood that price will now test this level and if it fails to breakout higher, this can become resistance.
The other rectangle areas plotted on the chart show developing resistance levels. They can be confirmed only after price has tested them more firmly.
From the above chart, you can easily see how the support and resistance levels plots areas where price reverses direction. Depending on whether this was a reversal near the top or a reversal near the bottom, they can be categorized into support or resistance levels.
Sometimes, you will find a support or a resistance area where price spends just a few sessions. One such example is the thick horizontal line that you see at the bottom of the chart.
You will notice how price dipped to this level before retreating strongly. This indicates a strong level of support at that level.
Benefits of trading with support and resistance levels
Many traders will initially find it a bit difficult to trade with support and resistance levels, let along drawing them. However, with enough practice you would be comfortable with identifying the support and resistance levels easily.
An important point to remember is that support and resistance levels are reactive in nature. In other words, you can identify these levels only after price has done something at these levels. Therefore, it is important to look to the market context and also understand how price has behaved at these levels before drawing to a conclusion.