Today we’re going to cover one of the most important and often incorrectly practiced or taught concepts in technical analysis, the infamous support and resistance zones. Notice how I used the word zones instead of lines? I’ll get into why later, but I assume you’re already questioning your current knowledge on this fundamental topic just from that sentence alone. In this post I will go into detail about what these zones mean and how to properly draw them on your charts.
What do these zones represent?
Support / Demand
In layman terms, it is a region of price where a currency pair fails to go any lower on repeated occasions. In other words, regions of price where there is a demand for buyers.
Buyers are more likely to enter contracts at this region
Resistance / Supply
Conversely, it is a region of price where a currency pair cannot/fails to go higher. In other words, regions of price where there is a supply of sellers.
Sellers are more likely to sell off their contracts at this region
Hope that makes intuitive sense. Moving on…
How do I chart these zones?
Every trader has their own method, but for me personally, I like to do a top-down approach for my analysis.
To plot your support and resistance zones:
- Start on the monthly time frame
- Work your way down, all the way to the hourly
- Look at regions where price has repeatedly failed to push up/below or regions where we had unusually long wicks pierce through.
- When moving on to the the smaller time frames (say the 4hr/1hr), use lines for the sake of visibility.
Before I show you an example of what correct support and resistance zones look like, let me show what not to do (even though the charts of 85% traders looks like this anyways).
Visually, this chart has too much going on. Practically, if EURUSD moves even 20 pips in either direction your overall outlook on the trade can change from short to long and vice versa, This complicates things, and leads you to close in and out of shorts and longs just based on minor movement. This is why we chart only the important zones and highlight the minor support/resistance regions with lines/horizontal rays.
Let’s move on to the correct way to chart your zones.
See how clean this looks? We drew our major support and resistance zones from the weekly time frame, and then put our lines in areas of high activity (support becoming resistance and vice versa). Now we can place our trade and not having conflicting thoughts as the trade plays out.
There is a lot of misinformation out there and I want to do my part in showing aspiring and even veteran traders how they can improve their analysis. If this article has helped, please be sure to leave an up vote and comment.