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How to Correctly Mark Forex Support and Resistance

Understanding levels of support and resistance may be the single most important aspect of your technical analysis as a Forex trader, and should ALWAYS be factored in before making any trading decision.   There are two different steps to using support and resistance levels (a.k.a., S/R levels) that you must understand before you can successfully use them as a tool.   The first is step is to identify where to place these demarcating lines, and the second step is to foresee how these levels may affect your trades and to take that analysis into consideration before placing a trade.   In this article, I will be discussing the first step:   reading a chart and deciding where to place your S/R levels.

So, what are levels of support/resistance?   Simply put, a level of resistance is where price resists moving higher due to the selling activity of other traders and a level of support is where price resists moving lower due to buying activity of other traders.   Identifying levels of S/R is not an exact science, but it is fairly simple and for most people it only takes a little time to start to feel comfortable with deciding where to place these lines on their charts.   Here are some guidelines to follow:

Levels of support/resistance can be identified on any time-frame; however, the most significant (i.e., strongest) are found on the higher time-frames such as daily, weekly, and monthly.   Personally, I prefer using the weekly chart to identify the relevant levels. Don’t become obsessed in support and resistance levels, you only need to mark the important ones. If dive down into the 5 min time frame and plot every single possible support and resistance level – you’re going to create a very confusing and ineffective trading environment.

support and resistance overload

Don’t do what this trader has done and over complicated the process!

In the USDJPY weekly chart below, we have a bullish trend occurring, and I have chosen two S/R levels (where I placed the dotted blue lines).   You can see how price “respects these levels” by touching or piercing the level (but rarely closing on the other side of it).

support and resistance 1

During ranging markets, focus on the range top and bottom (these are the main turning points), don’t let yourself get caught up within the noise in the center of the range.   For example, in the chart below GBPUSD price was in a range from about September 2010 to around October 2012.   If you were to look at the lower time frames within this period, you could identify other levels of S/R – but the weekly chart gives us a clear picture of the top and bottom of the range.   The levels “within” the range are less of a certainty and if you decided to trade based on them, it would be considered a higher risk trade.

support and resistance 2

In a trending market, you won’t see that many common points of support or resistance, because price is climbing or falling in a steady pattern.   So instead, you should focus on potential “swing levels” (old resistance acting as new support/ or vice versa) and major weekly levels which could potentially terminate trend movement.   This is illustrated in the EURAUD weekly chart below:

support and resistance 3

Don’t overdo it.   You shouldn’t have twenty levels of support/resistance identified on every chart.   We are looking for two or three areas where price “respected” the level or required a very strong push (think long candles) to break through it REPEATEDLY.   What you want to identify are those levels that show several incidences of price stalling and/or reversing.

If you overdo it with your S/R lines, the noise will make the  important levels invisible to the eye, this is no way to learn forex trading.   You’re just going to confuse and frustrate yourself in this scenario, and you may miss signals or fail to foresee the really big moves that are likely to occur, see this chart below:

support and resistance 4

The most important S/R levels are the most recent levels, however you may discover that price continually reacts at the same level year after year. Pay attention because these can be very important!

support and resistance 5

Even though you will be marking your chart with a “line”, keep in mind that an S/R level is really a small range – so price may not react exactly on that line, but should respond in that general area.

If price is continually zig-zagging its way through a previous S/R level that you have marked on your chart, do not attempt to trade there at this time. Sometimes a level becomes irrelevant, because traders no longer regard that price level as a great buy/sell point.   Just remember that what is happening in the most recent past is most important.

Many successful trading systems use support and resistance paired with other price action signals to build confirmation as to the probability of a trade’s success.   Next to price itself, support and resistance is the granddaddy of all technical indicators and should be the backbone of any successful trading system.   In my next article, I will discuss how to use S/R levels with other price action signals to set up high probability trade opportunities.

Today’s Forex Article Posted By  |  The Forex Guy

Dale Woods

Dale Woods

The Forex Guy is an educational Forex trading blog run by Dale Woods who has been a passionate retail Forex trader for over 6 years. Dale trades the Forex market exclusively with price action based methodologies, believing price action trading to be one of the powerful approaches used the market today, and really is the core foundation of any good trading system. Dale also strongly believes in keeping charts clean and keeping things simple, logical and uncomplicated. By making trading decisions straight off the raw price action data, you can ‘bypass’ unnecessary variables like exotic indicators, trading robots or magical pivot levels. Dale enforces the idea that there is hardly any edge trading news and economic data releases and much prefers to make trading decisions straight from the candlestick themselves. ‘The Forex Guy’ is dedicated to providing knowledge to serious and passionate traders who want to learn the art of price action trading, positive geared money management and how to psychologically condition themselves to become a professional trader.