Identifying Horizontal Support and Resistance from Previous Price History

Best Binary Options Brokers 2020:
  • Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Trading Education, Free Demo Account!
    Get Your Sing-Up Bonus Now!

  • Binomo

    Good Broker. Only For Experienced Traders!

Identifying Horizontal Support and Resistance from Previous Price History

October 23, 2020

Support and resistance levels are essential to technical analysis as they reference areas on a chart where price has a tendency to consolidate and potentially reverse from its previous direction. You might also hear some traders refer to these as “demand zones” and “supply zones” for support and resistance, respectively. Conceptualizing it this way refers to the fact that at support, price is low (and hence drives up demand), while at resistance, price is high, which lowers demand and drives up supply. But for purposes of this post, we’ll reference these areas of price consolidation as support and resistance or simply S/R.

When I’m looking for S/R levels, I’m looking for an area that has been recently tested more than once and validated without being broken. Take a look at the first example:

We can see four bounces off of support in a short period of time on the USD/CAD 5-minute chart before retracing higher. Trades could have been taken at the green arrows I drew in and landed well ITM.

When looking at a market, obvious support and resistance levels should stand out pretty quickly to you after some time studying the charts. These levels are often observable as areas where price has been noticeably consolidating, often at completely different time periods on the chart. Also, these levels can denote the price extremes on the chart, or where the highest high and highest low of the price are located.

Here’s the same chart, but provides examples of what I do NOT consider to be reliable S/R levels:

Every dip and turn on a chart should not be considered as tradeable S/R. Where I’ve drawn my arrows are what might be termed “minor S/R” at least within the context of the price history that’s displayed.

Here is the most obvious example of S/R displayed on this CAD/JPY 15-minute chart:

The first wick gives indication of a price level rejection and a potential formation of a future level. Price came down and touched near that level again. Depending on the price action (which would ideally be viewed on a smaller timeframe), you could have taken a call option near that level. Further call options were later available at that price as it continued to hold.

Also note that the above chart is a 15-minute rather than the more commonly used 5-minute. Support and resistance lines are great to determine on the higher timeframes in that more noise is filtered out on the higher compressions and leaves you with more credible horizontal price levels. That said, on higher timeframes, more time is compressed into each bar so you will naturally have a lower number of S/R areas relative to the same period of time, which will likely present you with fewer trading opportunities. The tradeoff, of course, to using the higher timeframes to identify S/R is that the levels tend to be more robust and yield set-ups that have a better probability of landing in the money.

The most obvious level in the following USD/JPY example comes at the 79.793 price level:

Best Binary Options Brokers 2020:
  • Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Trading Education, Free Demo Account!
    Get Your Sing-Up Bonus Now!

  • Binomo

    Good Broker. Only For Experienced Traders!

Price formed a double bottom before retracing back up. Price action may have been favorable to produce a call option at the second touch of 79.793 (first arrow) and certainly would have been a level of interest where the second green arrow is located for another call option.

In addition, this chart nicely reflects the importance of whole numbers as S/R in trading. Notice where the USD/JPY bounced off of – 80.001, or one-tenth of a pip above the clean, whole number of 80.00, which is commonly termed “psychological resistance” in this case. On major pairs, these are very important. For example, the round figures of 1.3000, 1.4000, and 1.5000 have produced significant price consolidation on the EUR/USD in its history. The GBP/USD has had several meanderings around 1.6000 in recent weeks. The 1.2000 EUR/CHF level is probably the most robust whole number S/R in all of forex at the moment, as it’s been publicly affirmed that the Euro will not be permitted to fall below a level that’s not at least 20% greater than the Swiss Franc (CHF).

Price levels are the main thing that I consider while trading. However, to be a successful trader they cannot be traded alone. They must be considered within the context of price action, meaning using the clues from the shape and patterns of price candles to make educated guesses regarding where price might go next. Taking a trade every time price simply hits a line on your chart will eventually result in disaster. You must do more to stack the odds in your favor than simply trading horizontal lines. You must consider current momentum, short-term (e.g., past hour, four hours) and long-term trend (e.g., past day, week) if applicable, news events, and even how far you are from potential S/R in the range that you’re looking to trade into. For instance, if you’re at a good support area, but price has been steadily declining over the past couple hours with weak retracements back up, and there’s minor resistance three pips above the current price, then you’re best off staying out of the trade entirely.

Most importantly, when looking for levels, choose those that have been tested more than once. If the price action has been choppy to the point where there doesn’t seem to be any favorable S/R to trade off of, don’t simply be content to choose mediocre levels as potential trading points instead or go overboard with how many you’re visually interpreting. That will cause you to take suboptimal set-ups and dampen your accuracy (i.e., overtrading). Confluence is key in trading set-ups. If the overall trend is up, you’re at a solid support area, you have a sizable range to trade into, and the retracement that brought you to support is showing exhaustion through price action (e.g., dojis, small candles), then it sounds as if you have a high-probability set-up and are looking at a great trade.

I definitely welcome any questions, so please don’t hesitate to leave a comment below!

UPDATE 24/10/2020 – In response to lots of questions I have made a follow up post on this topic here .

3 Simple Ways to Identify Support and Resistance in Forex

Support and Resistance Talking Points:

  • Support and Resistance can help guide traders with entries and exits.
  • New traders often make it more difficult than it really is to identify these levels.
  • Learn how to use Psychological levels , Swing highs/lows, and Pivot Points.

“Support and resistance” is common jargon for areas on the chart where price has a difficult time breaking through. Support levels tend to stop price from falling below a specific point and resistance levels act like a price ceiling that price cannot break above. Knowing where these levels are make it much easier to decide when to open and close trades , but how can we locate these prices to begin with? Today we will cover 3 simple ways to identify support and resistance in Forex.

Psychological Levels

Often called “psych” levels, psychological levels occur when price ends with multiple 0’s. It’s human nature to gravitate towards round numbers when discussing any topic that involves numbers, Forex included.

For example, when traders talk about what they think the Euro will be worth in the future, they probably won’t give an answer of 1.4278 or 1.3044. They are much more likely to round off the price to something simpler, like 1.4300 or 1.3000. The same thing happens when Forex traders place their orders. We will often see clusters of orders around these whole numbers, which creates price levels that can affect how price behaves. That’s exactly what we want for our support and resistance levels.

The most common psych levels involve price having two zeros at the end (not including the 1/10th of a pip ), such as 1.64 00 or 102. 00 . More powerful than that would be psych levels ending in three zeros, such as 1.3 000 or 12 0.00 . Leaving the most powerful psych levels of all, four zeros at the end, 1. 0000 or 1 00.00 . The chart below has four levels drawn at psychological levels. We can clearly see their effect on price action.

Learn Forex: Psychological Levels

Swing Highs & Lows

Another great way to find support and resistance levels is to mark levels in the past where price had a difficult time breaking through. As price moves up and down, each level that price has bounced off of could be a level in the future that price bounces off of again. This is a manually intensive method and takes time to draw on all the currency pairs that we trade, but can pay off in the long run.

Learn Forex: Swing Highs & Lows Acting As Support & Resistance

As the EUR/USD chart shows above, a level was drawn when price reached a new high or low (red circle). Later when price approached these levels again, they bounced off the same levels (white circles). The effect will not always be this clean, but it does occur fairly often. This is a method used quite often in Range Trading . We can buy at support with our stop loss below and we can sell at resistance with our stop loss above.

Pivot Points

Arguably the easiest support and resistance levels to add to our charts, pivot points are a built-in indicator on many platforms that will automatically draw key levels without any effort on our part at all. Pivot points are created by the previous period’s High, Low and Close prices, with the most common period size being the Daily period. We can use these levels just like any other potential support and resistance levels on our charts.

5 Ways On How To Identify Support And Resistance Levels That Matter In Forex Trading

If your support and resistance levels drawn on your charts look like this, then you need to see a doctor…

The 2 biggest problems with charts like the above are these: (1)It is messy and a messy chart just confuses the heck out of you (2)so if a messy chart confuses the heck out of you, how do you expect to trade well?

If you your charts look like that above, you need to start changing it to better show only the support and resistance levels that you really need. And I will show you can do that in this post.

The best thing you want on your charts is to have less clutter.

Less clutter means removing all the other “unnecessary things” that you don’t need and just have a clean refreshing chart with only the few things like a few indicators or support and resistance lines that you will need to make your trading decisions on.

Your Support and resistance charts should be like this:

  • note that I only have a few lines on this chart and removed everything else that did not matter.
  • you do not need to draw the blue boxes and the “R” and the “S”. These are just the most nearest support or resistance levels that I used to draw the support and resistance lines.

As you can see on the chart above, I’ve only highlight the support and resistance levels that matter in this situation.

Here’s the thing you need to understand about support and resistance levels: they occur in all timeframes.

  • Every timeframe has its own support and resistance levels.
  • The support and resistance levels found in the higher timeframes have much more significance than those found in smaller timeframes.

So in here, support and resistance levels that matter happen in larger timeframes and this post is about how to finding them.

5 Way To Finding Forex Support And Resistance Levels That Matter

Ok, now, I get to the meat of the article…how to draw support and resistance levels on your charts that matter.

#1: How Obvious Is It?

If you have a 5 or 6 year old child, try to show him a forex chart as ask him: How many mountain tops and valleys you can find on this chart?

That child is going to pick the most obvious peaks and troughs of price on your chart!

So the first thing you do when you scan your chart is to find levels that are so obvious to you and to thousands of other traders worldwide.

#2: Has Price Reacted To This Level On A Previous Occasion?

If price has reacted to a support and resistance levels on a previous occasion, then that gives you a really good clue that it is a support or resistance level of importance and you should expect the same sort of result when price hits that level again.

#3: Trading Timeframe

Well first, go back to the EURUSD chart above and notice that this chart is in the daily timeframe.

Support and resistance levels should be relevant to your trading timeframe based on the rules of you trading strategy, for example:

  • you may use the daily timeframe for your analysis of support and resistance levels but your trade entry can be based on the 4hr or 1 hour and your trade management can be based on the 1hr or the 4hour.
  • If you are trading the breakouts of support and resistance levels in the 5 minute timeframe then the support and resistance levels in the daily, weekly or monthly timeframes may not matter to you at all because it is irrelevant based on you trading system’s rules.

#4: Closeness of Price Action To That Of The Support And Resistance Level

If a support and resistance levels is too far away and price will not hit that level until like 6 months later, then it is absolutely pointless to draw such a line on your chart.

Price will not hit that level for a very very very long time and you don’t need that. So why put it there?

The only time that support or resistance levels needs to be drawn on your chart is when price action is very close to it and it is most likely going to hit it very soon, like in 2 weeks,days or even hours and you need to make your trading decision(s) based on that.

That’s when you draw it on your charts to make you aware of what is happening.

#5: Support And Resistance Levels Are Zones

Many forex traders think that support and resistance lines are just a fixed price level…that once you’ve identified it, wait for price to come to it and bounce off it or break it and take a trade based on those setups…

But the reality does not happen like that all the time.

If this was the case, drawing support and resistance levels would simply be a simple matter: find a price level where price bounced up or down from previously and draw a line and wait for price to come to it…and that’s it!

No, it doesn’t work like that all most times…

You see, there will be times when price will come exactly or be within a few pips or cross the support and resistance levels by a few pips and bounce.

Then there will be time when it will not hit the support or resistance level and bounce back even 10-20 pips (or even more)away from the support or resistance level.

Well, one reason why this happens is because of what is called support and resistance zones….

In a support or a resistance zone, expect price to move/bounce from anywhere within the zone.

This chart explains what a support and resistance zone means:

So how do you draw support and resistance level zones? Here’s what I do and I’m no saying this is the best way to do it:

  1. Identify the first resistance peak or the support trough and draw your first line.
  2. then as price moves along and then you have an outer extreme peak/trough form…that forms your outer line.

Note: the outer extreme line can be the first resistance peak as well as the support trough.

Best Binary Options Brokers 2020:
  • Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Trading Education, Free Demo Account!
    Get Your Sing-Up Bonus Now!

  • Binomo

    Good Broker. Only For Experienced Traders!

Like this post? Please share to your friends:
Binary Options Guide For Beginners
Leave a Reply

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