Support and Resistance lines are one of my favorite indicators because they work so well at informing you where price action is likely to find support and head back up or resistance and head back down. You could literally only place trades based off of this one indicator and, with proper money management, be a successful forex trader.
So here’s what they do: Support lines tell you where price is likely to reverse during a downtrend and head back up while Resistance lines tell you where an uptrend is likely to end and head back down. Sometimes these price reversals are short lived and eventually break through the support/resistance lines and this signals to you a potential breakout of a new trend has begun.
Here’s an example:
Now the next question you would ask yourself here as a new trader is how do I determine where to draw these lines. Since support/resistance lines are placed on your chart by you yourself, the answer is: It depends. It is truly a subjective measure, meaning there’s no mathematical equation for it, you determine where they go based on your own experience. But it is easy to learn. Here are the rules to keep in mind.
Rule 1) Look for swing points. These are exact points at which price action was headed decisively in one direction and then suddenly reversed and headed in the opposite direction. Place your line at the base or the top of the candlesticks that created this swing point.
Rule 2)The more often a support/resistance line is tested and holds up (is not broken) the more certain you can be that this is a true line of support/resistance. So just because you see that after the price was moving up and then took a sharp dive back down leading you to place a resistance line at the point the reversal happened it doesn’t mean that’s a true resistance level. In such cases where price action has reached new heights or new lows and you have no reference points to draw a support/resistance line from, zoom out to a higher time frame to get an idea where the next area of support/resistance will be. Meaning if you are on the 1hr chart, go to the 4hr to reference your lines, or if your on the 15 minute chart, zoom out to the hourly. Just make sure its at least a multiple of 4 since anything closer would not give you a good enough vantage point to make a new support/resistance line from.
And now for rule 3:
Rule 3) When price does pass through a Resistance/Support line, don’t get rid of it from your chart because that line has now become the opposite of what it was, meaning that support becomes resistance and vice versa. It is always interesting to watch a downtrend form, pass through a support line, then retrace back up to the exact line itself and suddenly continue back down again. Support has now become resistance. You can see an example of this in the image above.
Lastly and very importantly Rule 4:
Rule 4) Only consider it a break of support/resistance IF the candle manages to close above or below the line. If the candle breaks a resistance line, but then goes back down below it and closes, this means that the line held up as resistance. If the candle remains below or above the line at closing then its a no go! You can reference the above image again and see that the candle’s tails passed right through the lines and multiple occations, yet the candlestick closed back above the line. This is whay you also draw your lines along the bottoms or tops of the candlestick bodies and not along their tails. Think of the tails as extra “noise” you should simply try to filter out.
Now I wish there was more to say but it’s really that basic. One piece of advice would be to use higher level timeframes like the 1hr, 4hr, and Daily to draw these line and practice trading off of them. The lower timeframes will only frustrate you because there’s lots more “noise” on those charts that only experienced traders can filter out.
Think of using Support/Resistance lines as a way of framing the price action. With them you know what to look for, if it approaches a resistance line place a sell order after you see the price begin to work its way back down. Or you can wait and see if the candle closes above it, then place a buy and let the new uptrend carry on. You truly can make profitable trades using only this indicator.
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