What is Support and Resistance?
Placing support and resistance areas is the most important skill you can master in trading.
And placing them is easy.
Support and resistance areas divide your chart up into buy and sell areas. An area that sits above current price is a sell area, any area below current price is a buy area.
Support = Buy Area
The terms buyers and bulls are interchangeable. Support is a buy area as buyers are found at support.
Resistance = Sell Area
The terms sellers and bears are interchangeable. Resistance is a sell area as sellers are found at resistance.
On the GBPUSD chart below, you can see price is approaching the blue shaded area at 1.3500. This is a strong resistance (sell) area.
When price approaches a sell area large amounts of sell orders are triggered countering buy orders. This usually results in price stalling or even turning around completely for a reversal.
Why does this happen though?
It’s simple, the market movers like banks and hedge funds place their orders at areas of support and resistance.
Why Do Market Movers Place Their Orders At SR?
Good traders don’t randomly place entry orders and hope that they get lucky. They place their entry orders at significant price levels. Significant levels come in many forms.
- Yearly, monthly, weekly highs or lows.
- Rounded numbers such at 1.0000 and 1.0500 (also called psychological levels)
- All time highs or lows.
- Areas in which price has stalled or reversed more than once.
In the GBPUSD chart example above, we can see that price has stalled at the 1.3070 twice (green highlights). The next time it approaches the level it pulls back again and then again two more times (yellow highlights).
Why?
Because market movers place their buy orders at the 1.3070 and when price hits the area the buys trigger causing a reversal.
This happens all the time on every Forex pair and in every financial market for that matter.
This is how markets work, buy and sell orders are grouped together in the same general area and when they are hit we see the impact on price.
Placing Support and Resistance Areas
There are a lot of indicators out there that claim to give you great support and resistance areas.
I have tried them all and I do not find them reliable.
Support and resistance placements still need to be done by a person. These are my support and resistance areas, but if you want to trade more pairs you will need to place them yourself.
A good Forex trading strategy requires some work!
But don’t worry, it is easy, all you are doing is placing horizontal lines when you spot an area with two or more bounces.
I am going to break it down into a step by step process for you though. But first, we need to define some rules for support and resistance areas.
Three Rules to Support and Resistance
There are three key rules you need to keep in mind when placing support and resistance areas.
- Place areas on the body of a candle, the body is more important than the wick.
- The more recent the bounce the more important. Prioritise recent bounces over older bounces.
- You need at least two connecting bounces to place a support and resistance area. There are a few exceptions to this, the most common one being for points which are yearly or all-time highs/lows. When you spot a year or all-time high/low you can place an area there even if it has only once bounce.
Step By Step Guide to Placing Support and Resistance
Step 1: Select a daily chart and zoom out until you see around one year of data. Don’t worry if you see a little more or less than one year, it’s not a big deal.
Step 2: Identify the highest and lowest bounces in the last year and place an area at each. Remember, place your areas at the bodies, not the wicks and as these are yearly highs and lows placing them based on a single bounce is enough.
Step 3: Place support and resistance areas between the first two by connecting areas which have two or more bounces.
You will generally find that there are 5-8 support and resistance areas on most charts. If you have more than 8 you probably placed too many.