What Is Resistance And Why Draw Resistance Lines

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    1st Place! Best Binary Broker 2020!
    Best Choice for Beginners — Free Education + Free Demo Acc!
    Sign-up and Get Big Bonus:

  • Binomo
    Binomo

    2nd place! Good choice!

Contents

What Is Resistance And Why Draw Resistance Lines

Resistance lines are one of the basic tools of technical analysis. They are lines that denote areas where price action is likely to pause, stop or reverse. Why is this? It is because they are areas on a chart or price levels where the market is selling and is said to be resistant to higher prices. These are levels where the market has already decided to sell because it doesn’t think prices can go any higher, an area where the market may as well sell, an area where the market has sold before or an area where those who once were winners are now losers. Regardless of the reason, if price action halts, moves sideways or reverses it is said to have met resistance. Let me elaborate. If a market moves up to make a high and the falls back that previous high is now an area of possible resistance. This is because anyone who was a buyer at the peak is a loser when the market pulls back. Then when prices return to the previous high it becomes an opportunity for those losers to get out of the market at break even. Those sellers then become resistance to higher prices.

Resistance can come in the form of news, earnings, valuations, economics or many other fundamental and technical reasons. For us as chartists and technical analysts resistance, in terms of this article, comes in the form of price action. Price action that forms resistance can be a peak or series of peaks with even height, consolidation zones, congestion bands and other areas of interesting price action. Basically, any area that looks like it could give the market pause on a move up. I typically stick to peaks in bull/bear markets and congestion/consolidation areas. We can mark these areas by drawing a horizontal line that extends out to the right of the chart. This way, anytime that price action approaches this level you will know to expect a signal. The thing to keep in mind is that just like support lines and Fibonacci Retracements resistance lines are not a signal by themselves. Price action reaching a line is not a reason to enter a position. Resistance lines are target areas where signals may form,either a reversal, consolidation or continuation. It is vitally important to wait for a signal, and then a confirmation, before making any trades based on this technique.

How Do You Trade With Resistance Lines

Once I have identified a point of potential resistance I have two places from which I could draw my lines. Both are equally important so I always draw both. The first if from the highest closing price in the movement, the second is from the highest candlewick. I always use candlestick charts, just FYI. In my experience either line could provide resistance to price movement and it is the interaction of price and the lines together that matters more than any one candle, or any one line. This is a sort of convergence trading that uses multiple resistance lines and price action to form a signal. Look at the chart below, I have drawn two possible resistance lines from a peak formed in mid July. These lines are drawn from the highest close, and the highest upper wick, creating a tight band of resistance. Looking to the right hand of the chart you can see that once price met this resistance band it was halted. The thing to note is that it is the zone of resistance, and not just the line itself that is important. This is why waiting for a confirmation of resistance is required for a trade. The first two candles that test the zone show that resistance is there, but the reversal is not confirmed until the third candle.

Now let’s look at another chart. On this one, a 30 minute chart of USD/JPY exchange rates, there is a clear congestion area between 102.75 and 103. This band is also a triple top reversal pattern confirming upper resistance at 103. For us it is the zone we want to focus on as the upper boundary may not ever be reached. We can see that a few days after this reversal is confirmed prices drop sharply and then move higher to retest the resistance formed by the reversal/consolidation pattern. On the first test prices are repelled at the lower boundary but this is not always the case. On the second test prices break into the zone but reverse before they ever reach the 103 level. This does not mean they can’t or won’t, I just want to impress upon you that resistance may be more of a zone than a line drawn in the sand. A break above the lower limit is not necessarily a break of resistance. Sometimes it is a break into resistance, a break into a range in which sellers, short sellers and other forms of bearish traders will emerge. This is why it you must wait for a confirmation. With a band such as this one the confirmation would be a break out of the zone.

Support and Resistance Basics

The concepts of support and resistance are undoubtedly two of the most highly discussed attributes of technical analysis. Part of analyzing chart patterns, these terms are used by traders to refer to price levels on charts that tend to act as barriers, preventing the price of an asset from getting pushed in a certain direction. At first, the explanation and idea behind identifying these levels seem easy, but as you’ll find out, support and resistance can come in various forms, and the concept is more difficult to master than it first appears.

Trading With Support And Resistance

Key Takeaways

  • Technical analysts use support and resistance levels to identify price points on a chart where the probabilities favor a pause or reversal of a prevailing trend.
  • Support occurs where a downtrend is expected to pause due to a concentration of demand.
  • Resistance occurs where an uptrend is expected to pause temporarily, due to a concentration of supply.
  • Market psychology plays a major role as traders and investors remember the past and react to changing conditions to anticipate future market movement.
  • Support and resistance areas can be identified on charts using trendlines and moving averages.

Support and Resistance Defined

Support is a price level where a downtrend can be expected to pause due to a concentration of demand or buying interest. As the price of assets or securities drops, demand for the shares increases, thus forming the support line.   Meanwhile, resistance zones arise due to selling interest when prices have increased.

Once an area or “zone” of support or resistance has been identified, those price levels can serve as potential entry or exit points because, as a price reaches a point of support or resistance, it will do one of two things—bounce back away from the support or resistance level, or violate the price level and continue in its direction—until it hits the next support or resistance level.

The timing of some trades is based on the belief that support and resistance zones will not be broken. Whether the price is halted by the support or resistance level, or it breaks through, traders can “bet” on the direction and can quickly determine if they are correct. If the price moves in the wrong direction, the position can be closed at a small loss. If the price moves in the right direction, however, the move may be substantial.

The Basics

Most experienced traders can share stories about how certain price levels tend to prevent traders from pushing the price of an underlying asset in a certain direction. For example, assume that Jim was holding a position in stock between March and November and that he was expecting the value of the shares to increase.

Let’s imagine that Jim notices that the price fails to get above $39 several times over several months, even though it has gotten very close to moving above that level. In this case, traders would call the price level near $39 a level of resistance. As you can see from the chart below, resistance levels are also regarded as a ceiling because these price levels represent areas where a rally runs out of gas.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    1st Place! Best Binary Broker 2020!
    Best Choice for Beginners — Free Education + Free Demo Acc!
    Sign-up and Get Big Bonus:

  • Binomo
    Binomo

    2nd place! Good choice!

Support levels are on the other side of the coin. Support refers to prices on a chart that tend to act as a floor by preventing the price of an asset from being pushed downward. As you can see from the chart below, the ability to identify a level of support can also coincide with a buying opportunity because this is generally the area where market participants see value and start to push prices higher again.

Trendlines

The examples above show a constant level prevents an asset’s price from moving higher or lower. This static barrier is one of the most popular forms of support/resistance, but the price of financial assets generally trends upward or downward, so it is not uncommon to see these price barriers change over time. This is why the concepts of trending and trendlines are important when learning about support and resistance.

When the market is trending to the upside, resistance levels are formed as the price action slows and starts to move back toward the trendline. This occurs as a result of profit-taking or near-term uncertainty for a particular issue or sector. The resulting price action undergoes a “plateau” effect, or a slight drop-off in stock price, creating a short-term top.

Many traders will pay close attention to the price of a security as it falls toward the broader support of the trendline because, historically, this has been an area that has prevented the price of the asset from moving substantially lower. For example, as you can see from the Newmont Mining Corp (NEM) chart below, a trendline can provide support for an asset for several years. In this case, notice how the trendline propped up the price of Newmont’s shares for an extended period of time.

On the other hand, when the market is trending to the downside, traders will watch for a series of declining peaks and will attempt to connect these peaks together with a trendline. When the price approaches the trendline, most traders will watch for the asset to encounter selling pressure and may consider entering a short position because this is an area that has pushed the price downward in the past.

The support/resistance of an identified level, whether discovered with a trendline or through any other method, is deemed to be stronger the more times that the price has historically been unable to move beyond it. Many technical traders will use their identified support and resistance levels to choose strategic entry/exit points because these areas often represent the prices that are the most influential to an asset’s direction. Most traders are confident at these levels in the underlying value of the asset, so the volume generally increases more than usual, making it much more difficult for traders to continue driving the price higher or lower.

Unlike the rational economic actors portrayed by financial models, real human traders and investors are emotional, make cognitive errors, and fall back on heuristics or shortcuts. If people were rational, support and resistance levels wouldn’t work in practice!

Round Numbers

Another common characteristic of support/resistance is that an asset’s price may have a difficult time moving beyond a round number, such as $50 or $100 per share. Most inexperienced traders tend to buy or sell assets when the price is at a whole number because they are more likely to feel that a stock is fairly valued at such levels. Most target prices or stop orders set by either retail investors or large investment banks are placed at round price levels rather than at prices such as $50.06. Because so many orders are placed at the same level, these round numbers tend to act as strong price barriers. If all the clients of an investment bank put in sell orders at a suggested target of, for example, $55, it would take an extreme number of purchases to absorb these sales and, therefore, a level of resistance would be created.

Moving Averages

Most technical traders incorporate the power of various technical indicators, such as moving averages, to aid in predicting future short-term momentum, but these traders never fully realize the ability these tools have for identifying levels of support and resistance. As you can see from the chart below, a moving average is a constantly changing line that smooths out past price data while also allowing the trader to identify support and resistance. Notice how the price of the asset finds support at the moving average when the trend is up, and how it acts as resistance when the trend is down.

Traders can use moving averages in a variety of ways, such as to anticipate moves to the upside when price lines cross above a key moving average, or to exit trades when the price drops below a moving average. Regardless of how the moving average is used, it often creates “automatic” support and resistance levels. Most traders will experiment with different time periods in their moving averages so that they can find the one that works best for this specific task.

Other Indicators

In technical analysis, many indicators have been developed to identify barriers to future price action. These indicators seem complicated at first, and it often takes practice and experience to use them effectively. Regardless of an indicator’s complexity, however, the interpretation of the identified barrier should be consistent to those achieved through simpler methods.

The “golden ratio” used in the Fibonacci sequence, and also observed repeatedly in nature and social structure.

For example, the Fibonacci retracement tool is a favorite among many short-term traders because it clearly identifies levels of potential support/resistance. The reasoning behind how this indicator calculates the various levels of support and resistance is beyond the scope of this article, but notice in Figure 5 how the identified levels (dotted lines) are barriers to the short-term direction of the price.

Measuring the Significance of Zones

Remember how we used the terms “floor” for support and “ceiling” for resistance? Continuing the house analogy, the security can be viewed as a rubber ball that bounces in a room will hit the floor (support) and then rebound off the ceiling (resistance). A ball that continues to bounce between the floor and the ceiling is similar to a trading instrument that is experiencing price consolidation between support and resistance zones.

Now imagine that the ball, in mid-flight, changes to a bowling ball. This extra force, if applied on the way up, will push the ball through the resistance level; on the way down, it will push the ball through the support level. Either way, extra force, or enthusiasm from either the bulls or bears, is needed to break through the support or resistance.

A previous support level will sometimes become a resistance level when the price attempts to move back up, and conversely, a resistance level will become a support level as the price temporarily falls back.

Price charts allow traders and investors to visually identify areas of support and resistance, and they give clues regarding the significance of these price levels. More specifically, they look at:

Number of Touches

The more times the price tests a support or resistance area, the more significant the level becomes. When prices keep bouncing off a support or resistance level, more buyers and sellers notice and will base trading decisions on these levels.

Preceding Price Move

Support and resistance zones are likely to be more significant when they are preceded by steep advances or declines. For example, a fast, steep advance or uptrend will be met with more competition and enthusiasm and may be halted by a more significant resistance level than a slow, steady advance. A slow advance may not attract as much attention. This is a good example of how market psychology drives technical indicators.

Volume at Certain Price Levels

The more buying and selling that has occurred at a particular price level, the stronger the support or resistance level is likely to be. This is because traders and investors remember these price levels and are apt to use them again. When strong activity occurs on high volume and the price drops, a lot of selling will likely occur when price returns to that level, since people are far more comfortable closing out a trade at the breakeven point rather than at a loss.

Support and resistance zones become more significant if the levels have been tested regularly over an extended period of time.

The Bottom Line

Support and resistance levels are one of the key concepts used by technical analysts and form the basis of a wide variety of technical analysis tools. The basics of support and resistance consist of a support level, which can be thought of as the floor under trading prices, and a resistance level, which can be thought of as the ceiling. Prices fall and test the support level, which will either “hold,” and the price will bounce back up, or the support level will be violated, and the price will drop through the support and likely continue lower to the next support level.

While spotting support and resistance levels on a chart is relatively straightforward, some investors dismiss them entirely because the levels are based on past price moves, offering no real information about what will happen in the future.

Determining future levels of support can drastically improve the returns of a short-term investing strategy because it gives traders an accurate picture of what price levels should prop up the price of a given security in the event of a correction. Conversely, foreseeing a level of resistance can be advantageous because this is a price level that could potentially harm a long position, signifying an area where investors have a high willingness to sell the security. As mentioned above, there are several different methods to choose when looking to identify support/resistance, but regardless of the method, the interpretation remains the same—it prevents the price of an underlying asset from moving in a certain direction.

A Powerful Way To Draw Support And Resistance Zones

Support and resistance zones are a key when it comes to determining the level at which the price of a currency’s exchange rate is likely to reverse.

It is something I incorporated in my trading almost since the start.

The problem is, those zones can be very subjective. In most cases, a trader can usually only approximate those supports or resistances.

I remember having a hard time identifying the proper zones on my chart. I’d also get discouraged when I saw that other more professional Forex traders identified better or different zones on their chart.

I couldn’t seem to get it…

Then, I began researching “how to draw support and resistance”. I came across a few articles, and even bought a Forex trading course on the topic.

I personally find the widely-available advice on drawing the right zones to be very subjective. It doesn’t lead anywhere.

I first read about using a line chart to draw the proper zones. That helped a little:

But still, try it yourself and see if it works…

I still found this way to be slightly difficult to implement. It is hard to distinguish the strong from the weak support and resistance zones.

Slowly, I came up with a different way to identify the zones. I realized that this new way reduced confusion a lot. As an added bonus, it also gives a much clearer picture of how the market behaves.

A Powerful Way To Draw Support And Resistance Zones

The background story being given, let me outline the process I use to powerfully draw support and resistance areas.

1. Pick your favourite chart type

This first step is really simple and should be complicated. The only thing you need to do is to open any chart an pick the type you prefer. I use candlesticks but it’s up to you to use whatever you want.

Do it now! Reading is boring, I want you to apply!

2. Identify all swing highs and lows

Then, you want to identify all the highs and lows you see on your chart. You might need to scroll in the past a little bit.

I want you to put a line at every top and low you see. It should look like this:

The lines do not necessarily have to be at the complete low. The important thing here is to draw a simple line at all lows and highs. It shouldn’t be very subjective.

The powerful aspect of this step is that you will be able to easily determine whether the market is in a trend or not since you will see the highs and lows.

As you can see on the chart above, the market isn’t currently in a trend.

3. Add lines to connect the highs/lows

The last step in drawing support and resistance zones consists of linking the highs and lows you identified with horizontal lines. Those will become your main support and resistance zones.

Here’s what it looks like:

There is almost no way that the lines you draw will lie exactly on the highs and lows you identified. That is totally normal, be okay with it. Whenever you feel you can connect 2 highs/lows, add an horizontal line.

Once you have completed this process, you can be confident that the lines represent clear support and resistance zones. You can always adjust your lines, but it shouldn’t be necessary.

Let’s compare…

In both cases, the lines drawn look similar. You can see that the line chart has one more lines. On my part, I prefer to keep things simple. I only look for the main support and resistance zones.

Some Important Notes

It is important to understand that this method works great on any time frame. The logic remains the same.

Make sure that the zones you identify are connecting 2+ highs or lows. The more, the better.

Let’s Recap

You may say that this process gives the same result as identifying support and resistance zones through a line chart.

I agree. However, I find this process to be simpler and it helps identify the trend.

In the end, whatever the process you use to identify the support and zones on your chart, make sure you are comfortable with it!

How to Identify and Draw Support and Resistance Levels on Any Chart

Support and resistance levels are a powerful concept in technical analysis.

Many technical tools have been developed to take advantage of support and resistance levels in the market. This makes them one of the most wide-spread trading strategies when trading the financial markets.

If you’re a beginner in the market, understanding the concept of support and resistance levels should be your number one priority. This is because many advanced strategies rely on the basics of support and resistance.

What is Support and Resistance?

Support lines represent prices where the market had difficulties to break below.

This signals that the same price-levels could again represent an obstacle for the price to move lower. Usually, there is a high number of buy orders located just around important support levels. When these are executed it can cause the price to bounce off the support level. In other words, buyers jump into the market when the price approaches important support prices.

Resistance levels are similar to support levels, only that they represent price-levels at which the price had difficulties to break above. This signals that the same level could again act as a resistance, or barrier, for the price to move higher. While buy orders are located around important support levels, sell orders are clustered around important resistance levels.

Simply put, sellers jump into the market when the price reaches towards an important resistance level.

Many tools in technical analysis have the purpose to identify important support and resistance levels where the price could retrace. Some of those tools include horizontal lines, trendlines, channels, chart patterns and Fibonacci tools. There is even a complete trading style developed around the breakout of support and resistance levels, which is popular among retail Forex traders.

Read:

Types of Support and Resistance Lines

There are many types of support and resistance lines in the market. They differ by the way how they form. The list below shows some of the most important levels that every trader should know about.

Horizontal S&R Levels

Drawn by horizontal lines using at least one price-point

Round-Number S&R Levels

Psychological S&R levels around round exchange rates (e.g. 1.00, 1.10, 1.50 etc.)

Trendline S&R Levels

Drawn by upward or downward sloping trendlines using at least two price-points

Fibonacci S&R Levels

S&R levels based on Fibonacci ratios, used to identify the end of a price-correction

Dynamic S&R Levels

S&R levels which update with each new price-tick

1) Horizontal Support and Resistance Levels

Horizontal support and resistance levels are the most basic type of these levels. They’re simply identified by a horizontal line. First, you need to spot a past price-level where the price had difficulties to break above or below. Then mark it with a horizontal line which rays into the future. Once the price approaches this horizontal line again, there is a high chance that the price will retrace from that line.

The following charts show horizontal support and resistance levels in play.

Example of a Support Level on a Trading Chart

Example of a Resistance Level

Did You Know? For a support or resistance level to be important, the price should touch the level at least three times.

2) Round-Number Support and Resistance Levels

Another type of support and resistance levels are round-number levels, they form around round-number exchange rates. These support and resistance levels are psychological levels. As market participants tend to put their stop levels or profit-targets around round-numbers, increasing the number of market orders around those levels.

Round-number support and resistance levels are horizontal lines drawn at round-number exchange rates, such as 1.00, 1.10, 1.20, 1.25 etc. The following chart shows the EUR/USD pair with each round number acting as a line of resistance and support.

Example of a Round Number Acting as a Line of Resistance and Support

3) Trendline Support and Resistance Levels

Trendline support and resistance levels are not drawn by horizontal lines, but by trendlines which can be upward sloping or downward sloping. Since the Forex market likes to trend, trendlines are often used to identify uptrends and downtrends.

Each time the price approaches towards a trendline, there is a high chance that the price will bounce off the trendline. Just like with horizontal support and resistance levels, the trendline should have at least three price-touches before it is considered important.

Example of Uptrend

Example of a Downtrend

Similar to trendlines, channels can also be used to identify support and resistance levels. A channel provides both support and resistance for the price by its lower channel line and upper channel line, respectively. The following chart shows a support and resistance chart based on a rising channel.

Example of a Rising Channel

Example of Falling Channel

The next chart shows a falling channel acting as support and resistance for the price.

4) Fibonacci Support and Resistance Levels

The Fibonacci retracement tool is an extremely popular tool used to identify price-levels where a price correction might end. This leads to the continuation of the underlying trend. Price corrections are counter-trend price moves during uptrend and downtrends which give price-charts their characteristic zig-zag pattern.

Leonardo Fibonacci was a famous Italian mathematician from the Middle Ages, known for the Fibonacci sequence of numbers which goes like this: 1,1,2,3,5,8,13,21,34… If you divide any number in the sequence with its successor, you’ll always get the same result: 0.618. This ratio, also known as the Golden Ratio, is quite common in nature and occurs naturally even in the human body.

The Golden Ratio

Market participants believe that the Golden Ratio can be used to measure the extend of price corrections in the market. The 61.8% Fibonacci retracement is believed to provide important support for the price. In any case, practice shows the market tends to respect the 61.8% Fib retracement, including other variations of Fibonacci ratios. The following chart shows an example of how Fibonacci retracement levels are used to identify support levels.

Example of Fibonacci Retracement Levels

5) Dynamic Support and Resistance Levels

As their name implies, dynamic support and resistance levels change their level with each new price-tick. To draw dynamic support and resistance levels, traders usually use moving averages which are automatically drawn by your trading platform. The 200-day exponential moving average (EMA), 100-day EMA and 50-day EMA are very popular dynamic support and resistance levels.

This is followed by a large number of traders which increases their importance and self-fulfilling prophecy even more. Dynamic support and resistance levels are shown on the following chart.

Example of Dynamic Support and Resistance Levels

How to Draw Support and Resistance Lines

To draw horizontal support and resistance lines, we need to have at least one price-point at which to place our horizontal line. That price-point is usually identified as an obvious swing high or swing low where the price previously retraced.

Trendline support and resistance lines need to have at least two price-point to be drawn. Simply connect two swing highs or two swing lows in a price-chart with a trendline, and project the trendline into the future. However, bear in mind that in both cases (horizontal and trendline S&R lines), the lines become more important if the price touches them at least three times.

Daily Forex Support and Resistance Levels

Support and resistance levels on higher timeframes have greater importance than support and resistance levels on lower timeframes. The daily timeframe is especially popular to draw S&R levels, as many traders follow and base their trading decision on the daily timeframe.

Remember that S&R levels have a high degree of self-fulfilling prophecy, which means that more obvious levels tend to work better as a support or resistance for the price than less obvious levels on very short timeframes.

How to Draw Support and Resistance Lines in MT4

MetaTrader 4 is one of the most popular trading platforms among retail Forex traders which features advanced charting tools to identify important market turning points. Let’s take a look at how to draw support and resistance lines in MetaTrader 4.

Drawing Horizontal Lines

To draw a horizontal line on your chart, select the horizontal line button on your Toolbar and click anywhere on the chart where you want the line to appear.

Toolbar on Meta Trader 4

Horizontal lines are often used to mark support and resistance levels in the market, where the price might have difficulties to break below/above. The following picture shows a horizontal line drawn on the EUR/USD pair, where the price might find support.

Example of Drawing Horizontal Line on EUR/USD Pair

Drawing Trendlines

Another popular tool for chart analysis are trendlines. They are similar to horizontal lines, only that they slope up or down and are not necessarily horizontal. Trendlines are used to analyze the current market trend. To draw a trendline on your chart, select the trendline button in your Toolbar.

Choose Trendline in Toolbar on Meta Trader 4

Example of Drawing Trendlines

Drawing Channels

Channels are similar to trendlines, only that they include a second trendline which is drawn parallel to the first trendline. Again, channels are used to gauge the current trend with the upper and lower channel lines acting as support and resistance lines.

A trend channel (blue) drawn on the EUR/USD pair is shown on the following chart.

Example of Drawing Channels

Drawing Fibonacci Retracements

And finally, to conclude this brief introduction to chart analysis on the MetaTrader 4 platform, let’s see how to use and draw Fibonacci retracements on the chart. The Fibonacci tool is used to find price-levels where a “higher low” may form during an uptrend, or a “lower high” during a downtrend.

To draw the Fibonacci retracements on your chart, click the Fibonacci tool on your Toolbar and select the swing lows and highs on your chart, which represent the initial move of the trend.

The Fibonacci tool will draw percentage levels between the selected swing low and high, with the 23.6, 38.2 and 61.8 levels usually being the most important levels where the price might retrace.

Example of Drawing Fibonacci Retracement Levels

Now that you’ve broadened your understanding of the MetaTrader 4 platform and learned how to perform basic chart analysis using the built-in charting tools in your trading platform, let’s move on to a few important tips on drawing support and resistance levels.

Tips on Drawing Support and Resistance Levels

  • How Far Back to Draw Support and Resistance Lines?

There is no hard rule on how far back support and resistance levels should be drawn. Younger support and resistance levels are usually more important than older ones, as they represent a fresh price-level where the market had difficulties to break above or below.

As a rule of thumb, if you’re using higher time-frames such as the weekly one, focus on the past 12 months of price-data to identify potential swing-highs and swing-lows which could act as support and resistance for the price.

  • How to Draw Support and Resistance Lines in 15-Minutes Chart in Forex?

When drawing support and resistance lines, the same principles apply to all available timeframes. However, bear in mind that S&R levels on higher timeframes tend to be more important than S&R levels on lower timeframes, such as the 15-minutes one.

  • How to Draw Support and Resistance Lines on a Candlestick Chart?

Candlestick charts do a great job not only in creating graphically appealing price-charts, but also in identifying support and resistance levels. A candlestick consists of the candlestick’s body, which represents the opening and closing prices, and the upper and lower wicks, which represent the high and low prices reached during a trading session. You can use both the body and the wicks to draw support and resistance lines on candlestick charts.

The closing prices of a candlestick’s body tend to have a higher importance than the high and low prices represented by the wicks, since they show the prices at which market participants “closed their trading positions, took profits and went home by the end of the trading day.”

Pro Tip 1: Support and Resistance Levels Change Their Roles

An important characteristic of support and resistance levels is that they can change their roles once broken.

A broken support level becomes resistance in the future, while a broken resistance level becomes support in the future. This is very important to understand early in your trading career, as a popular trading strategy called pullback trading is built around this characteristic of S&R levels.

Pro Tip 2: Know the Difference Between Support and Resistance Levels and Zones

There is an important difference between support and resistance levels and zones.

As the names imply, a level is a specific price-level where the price might find support or resistance. A zone, on the other hand, refers to a zone of prices in which the price can retrace anywhere in between. Most of the time, the price doesn’t hit a S&R level right at the pip before it retraces. The closer the price reaches towards a S&R level, the higher the chance of a reversal.

Pro Tip 3: Use Multi-Timeframe Analysis to Identify Weekly, Daily and Shorter-Term S&R Levels

In practical trading, it’s a wise decision to perform multi-timeframe analysis (MTFA) on weekly, daily and shorter-term timeframes to identify long-term and short-term support and resistance levels. In essence, support and resistance levels on the higher timeframes tend to be more important than S&R levels on shorter timeframes.

Furthermore, different timeframes can show different trends on the same currency pair. A healthy uptrend on the 4-hour chart may look like a downtrend on the 15-minutes chart, while the downtrend may only be a counter-trend price-correction of the uptrend.

Final Words

The concept of support and resistance levels acts as a foundation for many advanced trading strategies, which is why you need to understand these concepts as early in your trading career as possible.

A support level refers to a price-level at which the price had difficulties to break below, while a resistance level refers to a price-level at which the price had difficulties to break above. As a result, traders anticipate that those levels could again form an obstacle for the price in the future. Support and resistance charts work great in all financial markets.

How To Draw Support And Resistance Levels

How To Draw Support And Resistance Levels

Support and resistance trading is very powerful and knowing how to draw support and resistance levels on your price charts is a key skill for any trader.

However, we often see that traders make many mistakes when it comes to finding the best levels. Drawing support and resistance wrong will lead to wrong trading decisions and bad trades.

In this article, we help you understand how to find the best support and resistance levels easily.

#1В What is support and resistance?

Support and resistance levels are key price areas on your charts where the price has previously shown a reaction.

Support and resistance areas are confluence zones and they can be major swing points where the price has turned away from and started a completely new trend.

Below you see a classic support and resistance chart. Resistance (R) points are the ones where price could not break above and turned lower and support (S) levels are reaction points where price shot up from.

It is so important to know how to find the right support and resistance levels because:

  • You can use them to time entries
  • You can set take profit and stops using support and resistance
  • They can be used to scale in and out of trades

Support and Resistance basics: click to enlarge

#2 The reality of support and resistance trading

Now comes the problem with conventional levels and why so many traders lose money using support and resistance.

Traders who just draw thin horizontal lines on their charts usually find themselves in one of the following two В scenarios:

  • Price turns ahead of their level and they miss the trade
    Very frustrating and traders tend to be more aggressive in their next trades which results in a downward spiral. This can also cause FOMO.
  • Price spikes through the levels and price doesn’t care about the level
    Such traders will become scared or they might lose their confidence because it seems like nothing they are doing is working.

Let’s take another look at the first chart and when we look closer, we can see that more often than not, the price actually spiked through the level or missed it. At first glance, the chart from above looked like the levels could help us describe the price action nicely, but when we look closer we see that the technique often fails.

#3В How to use support and resistance zones

Price is a very dynamic concept and volatility and momentum can affect price moves in significant ways. This is especially true when we look at the most important support and resistance areas.

When the majority of traders is trying to place a trade at a very obvious price level, the professional traders know this and they will then do their best to kick out the amateurs by letting price spike through levels or make it turn before the actual level.

To overcome this shortcoming and to improve our trading skills, we need to start using ZONES instead of just single lines.

The screenshot below shows the same chart again, but this time I used zones instead of just one line. As you can see, the zones now include all major turning points and we can describe much more effectively.

Of course, it’s far from being perfect – but nothing in trading is! By using zones, you can create so-called “noise zones” and filter out a lot of noise and stay out of troubles.

If this is new to you, just pull up price charts and start drawing zones instead of small lines when looking for levels. Also, try to keep the zones as narrow as reasonably possible. Over time, you will see how this will improve your chart reading.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    1st Place! Best Binary Broker 2020!
    Best Choice for Beginners — Free Education + Free Demo Acc!
    Sign-up and Get Big Bonus:

  • Binomo
    Binomo

    2nd place! Good choice!

Like this post? Please share to your friends:
Binary Options Trading Wiki
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: