The concept of support and resistance levels is probably as old as the markets themselves. It’s most likely the very first thing you’ve learned about forex trading, and one you still hear or read about every day.
As one of the most important concept ever, it’s sad to realize that many still don’t fully understand the way they work and their immense power in the markets. Support and resistance levels alone could make you a lot of money, or save you a lot of money by preventing you from making silly mistakes.
This is the reason for this article. We’re going to go back to the basics and discuss these good old levels!
Trading 101 – Support and resistance
Let’s define these two first then. A support level is a level at which a falling price stops and bounces back up. A resistance level is a level at which a climbing price stops and bounces back down.
Support levels are therefore also known as “bottoms”, because that’s the lowest point at which an asset went, whereas resistance levels are also known as “tops” because that’s the highest point at which an asset went.
To qualify as a support or resistance level, these prices must have been hit and bounced off of multiple times. The more times a level has been bounced off of, the stronger the level (and the stronger the breakout if a breakout happens, but let’s not get ahead of ourselves).
These levels are, in fact, areas
We must quickly discuss this one enormous mistake most beginner (or even advanced) traders make. Support and resistance levels are not thin, well-defined to-the-pip lines. They are areas.
If you were to look at the chart of any specific asset and scouting for support and resistance levels, don’t fall into the trap of thinking “well, this could be a level but the market actually went 10 pips above this previous top/bottom so it doesn’t fit”. It probably does fit!
People make the mistake of drawing support and resistance using a straight line, connecting tops or bottoms together. A single straight line is not an accurate representation of support and resistance! Instead, try drawing them using a rectangle.
This way, you’ll have a more accurate view of where the price might slow down and reverse. It will never be pip perfect!
Your daily routine
As a conscientious trader, you should know where the closest support and resistance levels are at all times. This is why drawing them should be part of your daily routine.
Every day, in the morning before the open of whatever market you’re trading (London ideally, if you’re trading the forex market), take 5 minutes to go over all the assets you monitor and draw the support and resistance areas. It shouldn’t take you more than 5 minutes, and very often it won’t even take any time at all since real support and resistance areas tend to stick around for a long time.
Zoom back, spot the strongest rejection areas and draw them. These will now have to be part of your plan!