Support and resistance trading is very powerful and knowing how to draw support and resistance levels on your price charts is a key skill for any trader.
However, we often see that traders make many mistakes when it comes to finding the best levels. Drawing support and resistance wrong will lead to wrong trading decisions and bad trades.
In this article, we help you understand how to find the best support and resistance levels easily.
#1 What is support and resistance?
Support and resistance levels are key price areas on your charts where the price has previously shown a reaction.
Support and resistance areas are confluence zones and they can be major swing points where the price has turned away from and started a completely new trend.
Below you see a classic support and resistance chart. Resistance (R) points are the ones where price could not break above and turned lower and support (S) levels are reaction points where price shot up from.
It is so important to know how to find the right support and resistance levels because:
- You can use them to time entries
- You can set take profit and stops using support and resistance
- They can be used to scale in and out of trades
Support and Resistance basics: click to enlarge
#2 The reality of support and resistance trading
Now comes the problem with conventional levels and why so many traders lose money using support and resistance.
Traders who just draw thin horizontal lines on their charts usually find themselves in one of the following two scenarios:
- Price turns ahead of their level and they miss the trade
Very frustrating and traders tend to be more aggressive in their next trades which results in a downward spiral. This can also cause FOMO.
- Price spikes through the levels and price doesn’t care about the level
Such traders will become scared or they might lose their confidence because it seems like nothing they are doing is working.
Let’s take another look at the first chart and when we look closer, we can see that more often than not, the price actually spiked through the level or missed it. At first glance, the chart from above looked like the levels could help us describe the price action nicely, but when we look closer we see that the technique often fails.
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#3 How to use support and resistance zones
Price is a very dynamic concept and volatility and momentum can affect price moves in significant ways. This is especially true when we look at the most important support and resistance areas.
When the majority of traders is trying to place a trade at a very obvious price level, the professional traders know this and they will then do their best to kick out the amateurs by letting price spike through levels or make it turn before the actual level.
To overcome this shortcoming and to improve our trading skills, we need to start using ZONES instead of just single lines.
The screenshot below shows the same chart again, but this time I used zones instead of just one line. As you can see, the zones now include all major turning points and we can describe much more effectively.
Of course, it’s far from being perfect – but nothing in trading is! By using zones, you can create so-called “noise zones” and filter out a lot of noise and stay out of troubles.
If this is new to you, just pull up price charts and start drawing zones instead of small lines when looking for levels. Also, try to keep the zones as narrow as reasonably possible. Over time, you will see how this will improve your chart reading.