How to Draw Support and Resistance Correctly
WHAT IS SUPPORT?
In a down-trending market, support is a price level from where buyers entered the market and restricted the price from going any lower.
WHAT IS RESISTANCE?
In an up-trending market, resistance is a price level where sellers entered the market and restricted the price from going any higher.
Some Important Facts about Support and Resistance.
1) Support and Resistance is not a price level(line), and it is a zone.
2) Support and Resistance is a zone from where price reverse.
3) Support and Resistance may be extreme highs or extreme lows.
4) Support and Resistance may show an oversold and overbought region, respectively.
5) Support and Resistance get better with time, but it doesn’t mean that it can’t be broken.
Now, let us begin and understand how to draw these zones.
Always remember whenever you draw support and resistance zones, start from a Higher timeframe. Not only for Support and Resistance but any of your analysis should always begin with a higher time frame. The higher time frame has the most influence over the market.
Steps on How to draw support and resistance zones
Step 1– Choose a chart of your choice and go to the monthly, weekly or any timeframe of your choice.
Step 2– Try to look for the area’s to which the price has reacted or to be more precise, search for regions from where the reversal happened (swing highs or swing lows).
Now, mark as many of those swing highs or swing lows you see.
Step 3– Use the rectangle tool from the toolbox and cover as many as swing highs or swing lows you have marked.
This rectangle region will be your Support or Resistance, so only cover swings which are in a straight line or nearby a line.
Step 4– For taking entries and if the zone is too big then try to connect more than two points with the horizontal line.
And remember, always look for 2 or more swings in a zone for the zone to be valid — the more swing points it has, the better.
Now when you are done with the higher timeframe, you can move to the lower timeframe and repeat the same steps.
Let us try to draw Support and Resistance on a chart.
Step 1 –
Choose a chart of your choice, and go to the time frame on which you want to find Support and Resistance Zones
I have chosen XAU-USD and 4H timeframe.
Step 2 –
Look for Swing highs or Swing lows.
Mark all the swing lows and swing highs and move on to the next step.
Step 3 –
Draw a rectangle which covers all the swing lows and a rectangle which includes all the swing highs.
The rectangle with all the swing lows will be your support zone, and the rectangle with all the swing highs will be the resistance zone.
Step 4 –
To mark the exact resistance level for taking entries, draw a horizontal line and try to connect at least 2 or more points.
Let us take some more examples.
Below is a perfect example of support which acted as resistance after the breakout.
A B, C, and D are the points where the price respected the major support, and finally, price broke the major support level.
F is the level where the price retested support and dropped down, telling us that previous support is now acting as an actual resistance for the price.
E and G are minor support, and H tells us that it is now acting as a resistance.
How does considering support and resistance as a zone help you?
In my early trading days, when I had very little knowledge about this topic, I used to draw support and resistance as a line. I used to use a strategy based on support and resistance to placing my entries.
While doing so, I always kept the stop loss few pips above or below the line but almost 90% of the time the price used to hit my stop loss and then go in the direction where I wanted it to go. This used to be very frustrating for me, and I am sure this has happened to many of you reading this article.
Let us try to understand how can considering support and resistance as a zone helps?
In the example above, I have drawn support and resistance as a line.
I have shown four support and resistance scenarios happening in that chart. Let’s understand each one step by step.
A – Here, the price found the support and bounced from that level twice, and finally broke past that level.
B – After the price broke previous support, it moved down strongly found support and started correcting. And finally broke the support and moved down again.
C – At, this point, traders were ready to take a trade because the price was approaching a previous resistance.
So, I took a trade at this point using my strategy but got stopped out by the price. After I got stopped out by the price, the price then met resistance and again dropped.
D- At, this point, the price again approached the resistance level where I got stopped out earlier. So, I took an entry again, but the same thing happened this time too.
Now, in the example above, I have drawn support and resistance as a zone and used lines to find entries.
When I used, support and resistance as a zone, I got the same entries, but I was not stopped out by the price as my stop loss was few pips above the resistance zone.
This is a vast difference, which made me way more profitable than earlier.
So, this is how considering support and resistance as a zone helped me improve my trading and be consistently profitable.
How to find support and resistance zones effortlessly?
The only thing which will help you find support and resistance levels effortlessly is your practice. You will have to practice finding these levels. You may also practice finding these zones while backtesting.
But the most outstanding deal is to find it in the live markets. Finding it in the live markets is way more complicated. But trust me, with proper practice and proper understanding of these level, it will get effortless for you to find these zones and in future, you will be able to do it with your naked eyes.
TIP – While you do your trading, try finding out support and resistance zones and see how price reacts to it. Because you are implementing something new in your trading, don’t take trades, try to get familiar to it and try to relate to what’s happening in the market. What this will do is, it makes it easy for you to to find these areas effortlessly as you keep practicing and when you feel like you are good at finding these areas, you can then use it in your strategy.
The reason why I use this method to find my support resistance is that I believe support and resistance cannot be a single level. There are many traders in the market and not everyone reacts to the exact price, So how can it be a level? It cannot always react to one individual level. Also, you must have seen that you cannot connect points using a horizontal line every time and that’s why when you try to see it as a zone it becomes much easier to draw and trade support and Resistance. And you can draw a horizontal level whenever you can connect two points so that you can get your entries on point.