Support & Resistance
The concepts of Support and Resistance can be quite confusing for new traders, so it is worth taking time to understand their role and importance in trading. To aid your comprehension we shall break it down into three steps.
Support & Resistance: Areas v Lines
2 or 3 points of contact
Higher Time frames
Support & Resistance: Areas v Lines
When considering where to place Support and Resistance, it’s nearly always better at first to draw areas of support or resistance and not lines. Experienced traders have their own preference for their placement of the lines, either at the wick or the body of the candle. I strongly recommend that newbies draw areas, until they feel they are confident in their preference for placement. By using an area it will help prevent you from missing trade setups. A price that enters an area is easier to spot, and makes for a cleaner and easily read chart. No one wants a chart full of lines.
2/3 Points of Contact
The next thing to remember when drawing your support and resistance areas/lines is to always have 2 or 3 points of contact. If you can see a clear peak on your chart where the price has turned at the same level on two or three occasions in the past, then you can be confident that that is the level where you should place your Support or resistance area/ line. It is essential to understand that the market can be very volatile and that any area/ line that you draw, will eventually be broken, so it is sensible to re-evaluate its position regularly over time.
It is important to understand that you placed your area/line in that particular position because in the past that is where the price reversed, therefore there is a high probability that it will continue to do the same again as long as the market trend remains the same, but it is not guaranteed. Regularly re-evaluating its position with consideration of what the market is doing will ensure that you continue to make profitable trades.
Higher Time Frames
Whatever time frame you are trading on, you always want to be drawing your support and resistance areas/lines two or three time frames above. The higher the time frame, the more powerful those areas become. If you were trading the one minute time frame for example, you should be drawing your areas/lines on the 5 or 15 minute charts.
As a guide, if you are forex scalping you should use the 30 minutes or hour time frames to draw your support and resistance areas/lines on, before going down to the lower time frames to place your trades.
Avoid trading the one minute time frame and then drawing your support resistance area/lines from the weekly charts, you want to exploit the current market trend by considering what has been happening in the recent past.
Remember you want to draw your support and resistance areas on two or three time frames above the time frame you are trading. That way you are trading the current market conditions.
An experience trader would trade like this:
They would draw their support and resistance areas on the one hour time frame and then go down to the 30 minutes or 15 minutes to look for a sign the market is reversing at that level. They do this by reading the charts or maybe using a reliable indicator or strategy.
