Draw Effective Support and Resistance
Support and resistance are leading concepts for traders. They are used in many strategies and help investors enter and exit the market. Also, they are widely used for placing take profit and stop loss orders.
Support and resistance levels are an effective tool for any market, including and stock. It’s not complicated to draw these lines. However, it’s crucial to know where to draw them.
Support and Resistance: A Piece of Theory
In general, support and resistance are levels where the price is supposed to meet an obstacle and turn around.
Support and resistance are levels where the price will either reverse or slow down.
Resistance is the upper level to which the increasing price moves. Traders expect the rate to either rebound from this level and move down or simply slow down its surge. If the price manages to break above the resistance, it will confirm the strength of the uptrend. However, the price will keep looking for the next obstacle to rebound.
Support is the lower level to which the declining price moves. Same as at the resistance, the price is anticipated to either reverse and go upside or slow down its fall. If it’s able to go through this level, it will confirm the downtrend's strength, and the price will continue to look for the next obstacle.
There are many types of support and resistance levels. Let’s consider the crucial ones.
Swing Highs and Lows
It’s a traditional type of support and resistance level. To determine any of them, you just need to pick up the closest point where the price turned around. If you draw a horizontal line through this level, you will get possible support or resistance.
So, if you see a swing low where the price turned up, it will be a support. If you find a swing high, where the price reversed downward, it will be resistance. This type of support and resistance is the most reliable.
Stepping Swing Points
This type occurs in trends. If you see a strong trend, you can expect the price to break support/resistance levels. As soon as the price breaks the obstacle, this level changes its first destination.
For example, imagine you trade in the downtrend. The price broke below the first support. As a result, this support became a resistance for the price. You can expect the asset to return to this level, and the pullback to occur. Thus, you can either enter a long position targeting the newly formed resistance or trade on a downside reversal from it.
Dynamic Support and Resistance
These levels change regarding the timeframe. They are not drawn. To get them, you need to implement . One of the moving average line functions is to serve as a support or resistance level, depending on its location to the price. As the indicator always moves, support/resistance changes all time.
Find Support and Resistance on a Chart
Support and resistance levels are easily determined on the price chart. The methods on how to find them on the chart are correlated with the types we explained above.
The traditional method of defining support/resistance levels is to find swing highs and lows. Swing means that the price rebounded from that level and changed its direction.
It’s enough to find only one maximum or minimum where the price reversed last time, draw a horizontal line through it, and wait until the price touches this level again.
Trendlines are usually called support and resistance levels. Simply stated, a trendline is a level that limits the price movement from top to bottom and helps draw a channel within which the price moves.
Thus, the upper boundary of this channel will be resistance; the lower border will become support. To draw such levels, you need only two dots (maximum or minimum) that can be connected by the line.
We have already mentioned Moving Averages briefly. There are other support and resistance indicators that ease the trader’s life and place support/resistance levels automatically. For example, Fibonacci retracement and pivot points. Both indicators are widely used in technical analysis. They build horizontal lines which serve as either resistance or support.
Use technical indicators that will determine support and resistance levels automatically.
Fibonacci retracement is a more complicated indicator. You need to find price extremums and implement the index correctly, so it works efficiently.
Pivot Points don’t require particular actions. All you need to do is place it on the chart like any other indicator. However, it is not a standard technical tool if you trade in MetaTrader, you will need to download it from the Internet.
There are many types of pivot points that serve different aims. We recommend using a standard pivot points indicator that consists of five levels. It has one central line that acts as support/resistance depending on the position of the price and two resistance and supports placed above and below it.
You can also apply to the price chart. However, we should warn you that Moving Averages are a less accurate way to determine support and resistance, as they are not stable and change their position according to the price movements.
Draw Support and Resistance Levels
Now, you know how to define support and resistance lines. It’s time to move to practice and bring them to the price chart. No matter what trading platform you use, there are tools to draw support and resistance levels.
To draw support and resistance you need only one dot and line tool.
If we talk about classic horizontal lines, you just need to find a panel with instruments, choose a horizontal line, and draw it through the peaks.
If we consider trendlines, the trading platform can either offer a trendline tool or the same line you used for the horizontal support and resistance.
If you rely on the indicators more, you should simply choose the indicator and apply it to the chart.
Draw S&R Levels in MT4
To draw support and resistance levels in MetaTrader 4, you should click “Insert” – “Lines.” There you can choose a horizontal line or a trendline. To implement an indicator, you should select “Insert” – “Indicators.” Here you will either choose from the trend instruments or from custom. However, the Fibonacci tool is located separately. Click “Insert” – “Fibonacci.”
Avoid False Breakouts
The main idea of the support/resistance levels is to stop the price. Thus, traders trade on the price pullback. However, if the trend is reliable and buyers or sellers prevail in the market, there are odds the level will be broken. In this case, traders trade on the breakout. So, they keep selling in the robust downtrend and buying in the strong uptrend.
Wide zones will help to avoid false breakouts.
However, there are situations when the price breaks the support or resistance, but the trend doesn’t continue, and the rate returns to previous positions. It’s called a false breakout.
It’s a big challenge for a trader or investor to define whether the breakout is real or false. There is no perfect rule that will prevent you from false breakouts. However, there is a tip that can help you.
Tip: Determine not support/resistance levels, but areas. A level is a precise point that can be easily overcome. If you widen the levels, risks of meeting a false breakout will decline. You can even use a line chart instead of a Japanese candlestick one to define zones easily. A line price chart includes only close prices. So, you eliminate unnecessary information.
Trade on Support and Resistance
Now is the tome for the most exciting and crucial part of this article:
- Entry points. The main idea of these levels is that the price is supposed to rebound from them. The easiest way to trade is to open a sell trade when the price bounces from the resistance and a buy position when it reverses from the support. This rule applies both to trend trading and standard trading on horizontal levels.
- Exit points. Support/resistance levels can also be used as exit points. You know that the price calms down near them. Thus, you can close the position as soon as the price comes closer to these levels. If you are sure the price touches support/resistance, you can place a take profit order at either support if you sell or at resistance if you buy to close the trade automatically.
- Stop Loss. Support and resistance can also give hints on a stop loss level. You should never place a stop loss on support or resistance. You use these levels to either put it above resistance or below support.
You can build your own trading strategy using support and resistance levels but we want to share several effective ones.
Trade in Ranges
This strategy works for a market in consolidation when there is no clear trend either up or down. You need to determine horizontal support and resistance zones. Yes, zones not levels as they will be more productive and allow you to stay in the trade longer.
The idea is the same: buy at support, sell at resistance. The whole trade will be placed in the room between support and resistance levels. If you know where the price will rebound, you don’t even need to wait for it to touch these levels. You can simply place pending orders.
Tip: remember about stop loss levels. If you open a long position, place it below the support. In the case of a short position, place it above the resistance.
Trade on Breakouts
The next strategy assumes that the momentum is robust, and the price manages to break either above the resistance in the bullish trend or below the support in the bearish trend. Yet, there are risks of a false breakout. That’s why traders trade on a pullback, not on the break of the level.
For example, we have a newly forming bullish trend, and the price has broken above the resistance of the range. Wait for it to reverse towards the resistance. It will be called a pullback. When the price touches the resistance, it will be your entry point. Open a long position and place the stop loss below the resistance.
You can also trade in a strong trend at a rebound from the trendline. Draw a line connecting at least two lows in the uptrend or a line connecting two highs or more in the downtrend.
These lines will perform as possible entry points. You need to be sure the trend is strong, that’s why you need to use such indicators as ADX to confirm the strength. Open a long position when the price bounces from the lower trendline in the uptrend and a short position when it reverses from the upper trendline in the downtrend.
There are several mistakes all trader make when drawing support and resistance lines or trading on them:
- Place zones. If you draw precise levels, not zones, there are risks they will be broken.
- Stop loss. Don’t place stop loss orders on either support or resistance.
- Technical indicators. When using technical indicators to place support and resistance levels, it’s essential to choose the right settings and set the indicator correctly.
- Higher timeframes. Support and resistance levels can be easily determined on any timeframe. Still, they are more reliable and necessary on bigger ones.
- Replacement. You should remember that support and resistance can replace each other. When the price breaks below the support, it becomes resistance. Vice versa, when the resistance is broken, it turns into support.
In conclusion, support and resistance are important levels every trader should know about. They help determine entry and exit points. Also, they show the current market picture and can predict the future price direction.
Yet, it’s essential to know how to draw them. For this, you need to practice a lot. A Libertex demo account allows you to develop your skills. It includes the full range of securities and instruments that resemble the real account. The main advantage is that you can train without any risk of losing money.
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Read the answers to the most frequently asked questions.
How Do You Calculate Support and Resistance?
There is no need to calculate support and resistance levels. They are simply placed on previous price swings.
What Is Strong Support and Resistance?
Strong support and resistance are levels where the price turns around.
How Do You Read Support and Resistance?
Support and resistance are levels where the price either reverses or slows down.
Which Timeframe Is Best for Support and Resistance?
There is no best timeframe for support and resistance levels. However, to find a more reliable level, it’s worth using big timeframes.
How Do You Set Support and Resistance Levels?
To set support and resistance, you can draw a horizontal line through the previous price extremum. Also, it’s possible to draw a trendline through at least two points. Yet, if you don’t trust your skills, you can implement technical indicators such as Moving Average, Fibonacci Retracement, or Pivot Points.