When it comes to drawing support and resistance, nothing comes close to practice, practice, practice. It’s the key to successful trading, for sure. It’s an acquired skill that takes time, but when you’ve got the knack, it can be incredibly lucrative. You’ll need to sharpen your vision and understand the nuances of markets, but it’s worth it. Once you’re able to draw support and resistance properly, you’ll have a trading edge, and likely reap the rewards.
So, let’s get started! The first step is to look at the price history of a particular currency pair, or even an index or mutual fund. Prices move in trends, and they often start at the same areas of support and resistance. Looking at historical data from the past five to ten years, you’ll begin to see a picture emerging of where prices had difficulty rising, and where prices were rejected.
When it comes to drawing resistance and support lines, you’ll want to focus on key levels. Generally, these levels are where prices had difficulty breaking through, or where prices were strong and refused to fall. Keep in mind that support and resistance levels are not absolute, and may shift from time to time. Still, keep an eye out for obvious and distinct levels where prices had difficulty crossing.
To help you draw a support or resistance line, identify the most recent pivot points. A pivot point is an area of high or low volatility where price has likely broken through or failed to exceed. The more recent the pivot point, the more important it is as a marker. When you have identified the recent pivot points, you can now draw a line connecting the recent pivot points – a support line or a resistance line.
From there, it’s time to dig into the price action. When prices are within a support or resistance area, you’ll want to see if there’s a pattern that can help you understand the level’s strength. If price is unable to cross the support or resistance line, identify any patterns that may be preventing it from making a break. These patterns will vary, but common ones include a double bottom or double top, head and shoulders, and trend lines.
Your last step will be to look for any signals that can identify potential trade setups. Once you’ve identified a support or resistance line and any patterns within, you’ll want to closely observe subtle price signals that could provide clues. Such signals could include a false break out or hammer, which can indicate a reversal or continuation of a trend. When combined with other signals found within the underlying price structure, you have a better idea of which direction the market will head.
When combined, all of these components are a potent trading technique. Support and resistance are possibly the most valuable concepts a trader can learn, but to master them you’ll need to test, watch, and analyze with diligence. With enough practice and attention to detail, soon you’ll be surrounded by golden opportunities.
If you’ve identified a support or resistance level it’s likely that some traders have already identified it as well. So, the next key to success is watching the order book or depth of market. Are traders entering orders to buy or sell above the resistance line? This might be an indication that the market is ready to break out of the aforementioned levels. Alternatively, if traders are entering orders close to the support or resistance line, they could be betting that price will remain in the range.
To succeed, it’s important to keep a close eye on the order flow around your identified levels. Enter or exit a trade at the right time, and the results can be magical. The goal is to buy low at a support level and sell high at a resistance level. This can lead to large profits, but timing is key.
Once you’ve spotted an opportunity, it’s time to prepare for the trade. Position size is important here, and you don’t want to bet the farm on any one trade. Monitor the risk/reward ratio, and adjust your trades accordingly. Note too that the level of risk rarely equals the magnitude of reward. The more risk you take, the more profit potential a trade has – but you don’t want to get over-leveraged.
Now that you’ve got an idea of the kind of moves to make, it’s time to get your trading to a new level. With practice and attention to detail, you will improve your results, learn to spot entries and exits, and grow better at managing your trades. Drawing support and resistance takes time and dedication, but it can be some of the most lucrative trading that you’ll ever do!
