Support and Resistance Levels – How to identify them?

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Support and Resistance Levels - How to identify them?
Support and Resistance Levels - How to identify them?

Understanding how to plot support and resistance levels on a chart is one of the most crucial aspects you, as an aspiring technical trader, need to grasp. Generally speaking, it is also one of the first techniques that traders come across when beginning their journey. Sadly however, this method is usually quickly overshadowed by the vast array of colorful indicators offered on one’s platform, often leaving the beginner trader overwhelmed.

What is support and resistance?

A support level simply denotes the floor of a market, whereas a resistance level represents the ceiling. In other words, a level of support is where downside is capped due to the buying action of other market participants. A resistance level is similar, only turned upside down. Instead of buying activity, it is the selling action of market participants holding this level firm.

Look for connecting points!

Take a look at the image below. This is a daily chart of the AUDUSD pair with two neighbouring support and resistance levels attached. Very often, as you’ve probably already realised, these barriers can be subjective. In fact, it’s likely that you’ve already mentally noted different levels of interest on our chart! Unless one is using psychological levels (round numbers) or market open and closing points as support and resistance, we feel it is unlikely that one will ever fully remove this subjectivity. Be that as it may, there is a well-known technique traders can utilize to help…

Treat support and resistance levels as zones.

Using the same chart, we’ve gone ahead and removed the levels and replaced it with a zone. See how much clearer it looks? Expecting price to react to the pip off of a level, while it does happen occasionally, will only lead to frustration and more losses than necessary. Adopting the use of a zone in place of a definite level, in our opinion, gives traders a far better chance at pinning down tradable turning points in the market.

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Knowing when a support and resistance zone is consumed.

As far as we’re concerned, there is no definitive approach to determine whether or not a support and resistance zone has been fully consumed. Experience has shown, nonetheless, that waiting for a candle close to take shape beyond the zone has been the most effective. To demonstrate, take a look at the image below. Notice that when a reasonably sized candle closes above or below the zone, a continuation move is sometimes seen.

Unfortunately, it is not as simple as watching for a strong candle close. There are additional elements one should consider! For instance, in order to expect a continuation move (sometimes following a retest to the broken boundary giving one a nice signal to trade) to play out, we initially look for space to move beyond the zone, as in the example below highlighted with a green arrow. Price broke through and retested the underside of the zone as resistance. Note that in this circumstance there was no obvious demand seen to the left below this zone, thus allowing price to freely trade lower.

Additional points:

It is considered that the more times an area has been tested, the stronger it is, and the more likely a bounce will be seen.
What timeframe should one plot support and resistance zones on? This is, of course, trader subjective. However, levels of support and resistance can be found on any timeframe. Generally, the higher-timeframe structures are said to take precedence over the lower timeframes. For example, we would not want to be buyers at a H1 support level knowing that a daily resistance level is lurking just ahead!
Color code your levels. If, like us, you trade the markets using a multi-timeframe approach, color coding the levels helps organize your charts in a way that you always know where you are in the bigger picture.

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