How to Draw Support and Resistance Levels

June 10, 2013 07:02 AM

How do we draw support and resistance levels?

As a trader with few years of experience trading the markets I often get asked this question by my friends new to trading and technical analysis. Here are a few easy tips to quickly and effortlessly draw your support and resistance levels.

1. Draw the ‘’obvious’’ swing points first

The first step should be to draw the ‘’obvious’’ swing points. These are areas on the chart where price got strongly rejected and subsequently reversed direction. Below is very recent 1 Hour chart of the NZD/USD currency pair covering the last week of price action.

The yellow circles highlight what I consider to be the strong price swing points on the chart. It took me less then few minutes to draw this chart.

2. Don’t overthink it!

Lot of newer traders get hang up in their thinking instead of just drawing the obvious levels they see on a chart. If you have to think long and hard if a price level is relevant enough to draw on a chart, it probably isn’t.

Drawing important support and resistance levels should be easy, especially once you get used to it. Overthink it too much and you’ll just get confused and paralyzed with fear and inaction.

3. Support and Resistance levels are often zones of interest not exact price points

One of the most common hang-ups for new traders is their oppression with drawing the exact price level. Let’s look at the example on the NZD/USD 1H Chart again, this time from another angle.

The chart shows 2 instances where price reversed in the vicinity of a previous resistance level. In the first example price reverses 7 pips away from previous resistance. In the second it reversed within 9 pips.

The Goal is to make money not create chart art!

The purpose of drawing these levels is their usefulness for future trading. They’re supposed to show areas where price may reverse or brakeout in the future. The purpose of the levels is NOT to show what happened in the past or draw fancy chart art.

If price previously stopped at 0.82118 in the past like in our first example above, it is highly unlikely that price will hit that same price level again to the pip and reverse. A more likely event is that price either gets near that level within a few pips, or just pierces the level by a few pips and then reverses. That is if price decided to reverse, it may just blow right through the level without looking back.

4. Always leave some breathing room for stop hunting!

I’m not talking about the conspiratorial ‘’the broker runs my stops’’ mentality here, but about an actual market mechanic that can present itself around important support/resistance levels.

You should always leave some breathing room both below and above a price level for the inevitable stop hunting that occurs around important support and resistance levels. Keep in mind that you’re not the only one seeing that resistance or support on their chart. Traders all over the world mark these levels. What generally happens around these levels is that traders, especially institutional traders, will try to run the stops of the weaker market players and force them out of their positions.

5. More price touches means more relevance

The more times price hits a certain price level the more relevant that price level becomes.

Relevance doesn’t mean rejection!

Keep in mind that just because we call a price level relevant, that doesn’t mean that the level will support or contain the price the next time it gets to the level. A relevant level may in fact turn into a nice level to look for a brakeout of price instead.

6. Mark those double or triple zero levels!

You should have important triple or double zero levels marked on your chart at all times, regardless of whether price has made a reversal at that level before or not. The chart below shows an example of this.

Price bounces off the important triple zero 0.8000 level despite having no previous interaction with this level and despite not making a previous swing point here in the past. Price later returns to the 0.8000 level and is strongly rejected.

In addition to marking these levels, whenever price hits in the vicinity of an important double zero level (0.8100 for example) or triple zero level (0.8000 for example), you should mark that level (0.8000) instead of trying to pinpoint the exact price to the pipette (0.80053).

These areas along with the .0050 areas are important support and resistance levels where professional market players will try to force the weaker players out of the market.

7. Support and Resistance levels are easier to see and draw on the higher timeframes

Support and resistance levels work on every timeframe but they look and are easier to trade the higher you go up in timeframes. The added noise level on the lower timeframe charts makes it harder to both mark and trade these levels efficiently.

Look at the charts below. The first one is a 1 Minute chart of the EUR/USD currency pair.

Notice how we can still mark some levels of support and resistance but they’re not nearly as well respected as they are on the higher timeframes. Additionally, notice how we had to draw ever larger rectangles in order to try and ‘’contain’’ the previous price action. In these areas price pierced the previous level by just a little and then reversed.

Stick to higher timeframes if you’re new to charting and technical analysis!

This frustrating ‘’fakeout’’ market behaviour is a very common occurrence on the low timeframe charts. This is something you should avoid in your trading, especially if you’re new to charting and trading support and resistance levels.

Now look at the chart below instead.

This is a 4 Hour chart of the GBP/USD currency pair showing the recent price action. Notice how much cleaner the chart looks. The levels are few and far between, the noise level is greatly reduced and there are not as many ‘’fakeouts’’ and a need to draw large areas of containment.

Hope that my advice on drawing support and resistance levels was useful. Now open your charts and start drawing!

Tags:
nzdusd, gbpusd, swing, h1, h4

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