How To Best Draw Support And Resistance Levels Like A Professional

support and resistance forex
What Are Support and Resistance Levels in Forex

Most beginners focus on getting support and resistance levels drawn.

While the professionals identify them as zones. A 2 part area where the market could cross the levels but not exceed them.

Support and resistance levels are not grounded. They are like the tiles on your bedroom floor or the wall in your ceiling.

Keep in mind that support and resistance levels are flexible in nature . They behave like the three ring ropes found in a wrestling ring.

And that is why markets have many false breakouts.

They usually occur below support or after the resistance level.

What Do Support and Resistance Mean in Forex?

Buyers and sellers. The bulls and the bears. They are the emotions that come with the financial commitment.

These emotions are the puppet master. They are the fingers behind the strings that pull the market into a frenzy or a free fall.

There is 4 puppet master.

Greed is the motivation behind trending market. Fear is the catalyst that market plunge in reverse with no warning.

Regret is the reason why pullback occurs. Anxiety is the cause of a breakout with no sign of a pullback.

Demand and supply. Traders all over the world have one thing in common.

They made up 95% of losing trades.

I am no exception. When I first started trading. I didn’t know what to do when a trade goes against my long position.

I hope. And I pray. But the market won’t let up.

I had to take a loss.

A huge one.

This creates pain and with it, an experience I won’t forget if it happens again.

And that is why when demand rises to that level again. I’ll short instead.

Retail traders and wholesale traders. Marker makers have access to bids and asks from all traders in their brokerage.

Retail traders only have access to what they see on the chart.

Even with volume as a guide. They are ticks.

When buying momentum stalls and price reverses into a pullback.

Buyers who have missed out on the opportunity will wait for the price to fall back. They will jump in and snap the price up.

This will turn it into a continuation pattern and is what retail traders deem as support.

When price reverses into a support and break.

Buyers who have lost money going long are waiting for a pullback to be sellers instead. Those levels became resistance.

How to Identify Support and Resistance Levels in Forex

There are 3 phases in the market but only takes 2 to kill most retail traders. Trending market. Uptrend or downtrend.

Most retail traders like to take counter trend trade.

I for one started getting killed picking tops and bottom.

I wasn’t always on the ball.

I didn’t like to watch the market. And so I always miss those big moves.

The easiest way for me to gain big returns was to be the first to jump in. This is when the market is about to do a reversal.

I didn’t learn my lesson.

I took it pretty hard.

Have you heard of the falling knife?

Yes. I’m always there to catch when the trend started.

I had to get burn for 3 years before I realized something isn’t going anywhere.

How Much Does It Take to Move The Market?

Forex is a trillion dollar a day transactional trading vehicle.

There is no quick answer to this thanks to Google. But the theory behind this is. It takes a lot of money and a whole lot of fake orders to move a market.

With this in mind.

It’s too expensive to push a bear candle into a hanging man. Let alone a full-fledged bull candle.

You can see from the chart below.

What I have in this chart is a momentum indicator. Also known as ADX (average directional index).

You use this to measure the strength of a trend.

I also have an EMA (exponential moving average).

It is a trend following indicator. It is used to track the movement of price. The purple one is a 200 EMA. The red one is 10.

The green and red bars are volumes. You use this to measure tick volume.

The answer is (c). There are ready and more affluent buyers there than at (b).

Why Does It Matter?

So unless this level doesn’t mean anything. I don’t see why anyone would wanna buy here.

If the market does break this level. This could mean buyers are not interested anymore and sellers could take over.

Market makers and retail traders are always speculating about stop hunting. It doesn’t cost them a lot to move a pip or two just to take them out.

Do you know if market makers take out stops to make money?

This is especially true if your stops are in their way of the true direction.

Some say volatility is the culprit.

Either way, nobody is stopping you from jumping back in again.

You can AND should enter again if the bias you had is still aligned with the trend.

The Psychology Behind Support and Resistance Levels

The first step to identify support and resistance is to understand the market cycle.

The market goes through three phases to get to anywhere in the chart.

They are the uptrend, channel, and downtrend.

The first thing before a market rise. There has to be demand. When a demand exceeds supply. That’s where breakout to the upside occurs.

In the image below. You can tell where there are more buyers than sellers.

The above image is an ideal situation where no two levels of buyers, bought at the same level. It’s usually higher than the previous buyers.

There is an exception to this. Highlighted in (a). This is also known as a double bottom.

There are buyers who have seen buying power at that level. They too were quick to jump in when the price got back to that level.

How To Draw Support And Resistance Lines In Forex

Now that you understand the factor behind support and resistance. Let me show you how to draw them.

You are looking for a clash between buyers and sellers. One of them has to be strong enough to push them back further.

When support forms, demand exceeds supply. Whenever sellers step in. More buyers rush in to push prices up.

This is as shown in the image below.

When supplies get bought up by buyers. It creates a lot of buying pressure.

When a resistance forms, that is when supply exceeds demand.

When buyers rush in. Sellers step in to push prices down.

This is as shown in the image below.

There is a myth going on.

It’s about how the market works.

Why a market starts with a breakout. And that breakout turns into a trend.

It goes like this.

Market makers supply lots to banks, brokers. They, in turn, sell price to wholesale clients like hedge fund and institutions.

Retail traders like us have to select retail pricing.

So when wholesale buyers snap up prices. The market takes us by surprise and needs time to adjust to the unprepared.

If market makers time their purchases correctly. Other traders like us will take notice and jump in.

This pushes prices to where market makers intended the shock to lead.

When you draw support. There will be a sudden intense pressure on sellers and buyers. This is where the bears are being pushed back by the bulls.

This conflict pulls in other traders attention and they push price further up.

Shown here in the image below.

When you draw resistance. The buyers are being pushed down by the sellers. There will be an immediate change from a rising market to a falling one.

This tussle caught the attention of other traders and they step in to push the price down.

Shown here in the image below.

How To Draw Support And Resistance Lines In MT4

I’m using a Samsung note 5 to draw all my support and resistance levels.

Let me go through the steps from start to finish.

Step 1: Select A Trending Currency

Step 2: Find Bull Pressure

Step 3: Find Bear Pressure

Step 4: Tap and open tool

You open it by tapping once on your screen as shown in the image above.

Click on the shape icon shown below.

Click on the plus icon shown below.

Click on the horizontal line as seen below.

Plot your support and resistance levels.

There are a lot of support and resistance levels you have to track. So which one considers key levels?

Don’t worry. It’s not that complicated.

Let me show you.

The most important thing about drawing support and resistance levels is the trend.

The next important part is recognizing only the current levels.

How To Draw Support And Resistance Levels Like A Professional

You are looking for recency. Most traders can only remember the current situation.

There is an exception. But it’s not of concern at the moment.

Retail traders can’t move the market unless they have 6 to 7 figures as trading chips.

So you are looking for price to rise to the top of the resistance level.

There is 2 outcome when price touches that level.

First, it retreats and closes below it.

Second, it rises and closes above it.

There are 3 setups retail traders can take advantage of.

The first is counter-trend trading.

Do you want to take a quick swipe at most 1 to 3 pips shorting the USDJPY?

The second is swing trading.

This is where traders who had missed out on the run-up, are waiting for the pullback.

This is where they will continue pushing the price back to the original resistance level.

The last is where you jump in after price had close above the resistance level and place a tight stop.

This is where risk takers make their initial gold.

Actually, there is a fourth one.

This is where patience traders wait for a pullback.

The pullback appears before the resistance level. This is where resistance level becomes a tool.

This is where sellers who got caught unexpected are waiting for their chance to get out with a small loss.

Most sellers are willing to get out at breakeven if there is a second chance.

How To Trade Support And Resistance In Forex Market

They said the trend is your friend. The best hedge fund was trend followers.

What I’m going to show you are four ways I would do to make a quick cash with when a key level gets rejected.

When Price Rejects Resistance

This is an act of either done by HFT (high-frequency algorithmic trading). It could also be where buyers are taking profits from their trade.

Either way. Price closes below the resistance level.

Next, imagine what price would do if you were bearish on the pair.

Imagine how price will move its key to preparation. Being prepared is critical as it heightens anticipation.

This has many benefits but the one thing it does is planning ahead.

I got this idea from Lance Beggs of YTC Price Action Trader.

Let’s see how it pans out.

The first bear candlestick appears. Let’s see if the market responds with another.

It seems the force is strong with the bulls. Buying momentum is still there. Traders are still hopeful.

When Price Does A Pullback

When you think the buyers have the upper hand. A bear candle appears and tests the market.

Market makers always do this to trap traders who wish to make a quick buck.

Anxious traders who missed out on the run-up will always jump in at any given chance.

I know because I never took that lesson to heart.

The good news is.

Swing traders are able to bag a good profit out of this.

What happens next is the 3rd outcome price would do to trap traders.

When False Breakout Occurs

The Forex market is notorious for the false breakout. They lure traders into a buying frenzy and trap them with a reversal.

The smart ones got out with a loss. The stubborn ones hold onto their losses while they watch the market eat their profits away.

There are exceptions to a false breakout.

It depends on the time of the day.

Tokyo or Sydney closes are more legit. While Asian sessions and London are more prone to trapping traders.

If you hold onto your losses. This might happen.

If you have yet got out the market will reward you with a second chance.

If you are greedy and assume you are invincible. The next one will humble you.

There are several reasons why a reversal became another continuation.

This has baffled many retail traders. Those who didn’t cut their losses get another chance.

This does not happen often but the simple truth is.

There are many traders who trade at the different time frame.

Some scalp the 5 min. And there are traders who trade the 4 hours.

Let me show you what I mean.

This is the pullback the market does. It looks like a reversal but instead, it did a double pullback.

And the reason behind it is this.

The above image is from the same currency pair but at a much higher time frame.

All this is good. But what can it do for you?

How Do You Trade Support And Resistance?

There is 2 outcome when the price reaches a key level.

The first is where price closes after it.

The second is when price rejects and closes before it.

In this example below. Price rejects and closed before a resistance level.

Then move on to the framework that governs the possible outcome. There is 4 framework when the price reaches key levels.

One of it is when price rejects the resistance line.

The second is when the price does a classic pullback followed by a swing.

The third is when the price does a reversal.

The fourth is when the price does a reversal followed by a pullback. This is also known as a double pullback.

Trading Pullback in a Strong Trend

Once the price has show bull strength. It is time to set up your entry and exit.

The profit target is the recent test of the last high.

Let’s see what happens next.

It took out the recent high and more. It doesn’t matter much because you got out at a profit.

Next…

The Counter Trend Techniques

A false breakout occurs because one side of the market seems stronger than the next.

They are able to break key levels until the other side gains more support and pushes the price back.

A false upside breakout occurs when the market rises above resistance level. This lure more buyers in before reversing and falling back.

Rumor has it that market makers are willing to spend hundreds of millions of dollars to hunt your stops.

The truth is institutional firms are employing HFT (high-frequency trading). The “black box” steps in and does a quick scalp in the millions. It does a quick profit on it’s way up.

The big wick it left behind is usually a sign of it at work.

You can’t tell which is which, but I’ll show you. How you can take advantage of the telltale sign and profit from it.

False Upside Breakout

You can only sell a false breakout when price shows weakness like a double top or a 123 top.

This is where you plan your entry and exits.

Open a limit order and place it 3 to 5 pips below the low of the trigger candlestick.

Set your stop loss 5 to 10 pips above the high of the trigger candlestick.

The take profit is the recent low or the next resistance.

Let’s see how it pans out.

Is Swing Trading Profitable?

Yes, it is. This is especially true if you are buying at value or undervalued price point.

I use a 10 EMA to track the trend direction of the market.

If the market is in an uptrend and price falls below the 10 EMA.

This is a valuable level to buy.

You are picking the bottom.

Having said that there are exceptions to this rule.

This is especially so if it’s accompanied by news release.

Remember this? Look at the image below.

The reversal is only valid for traders on the hourly chart. Traders who are on the 4-hour chart have started.

Why is swing trading is so popular?

I presume because of its immense ability to give the traders plenty of leverage and money.

This is only true if you are trading a much higher time frame.

If you want to be a swing trader. Anything below 4 hours is a waste of time and resources.

You must open a buy limit 5 to 10 above the high of the trigger candlestick. Put your stops 3 to 5 pips below the low of the trigger candlestick.

Conclusion

So far you have seen how to draw support and resistance levels.

The 2 outcomes when the price reaches a key level.

And the 4 framework price would abide by.

What you didn’t realize is the risk to reward ratio. The risk you took is equal to or more than the potential the market can give you.

If you can’t find a better way to improve your odds on this. Even if the system claims to give 95% accuracy. You will still lose money trading forex.

I bet you wouldn’t believe this.

An accuracy of less than 50% can actually make more money than a trading system with higher accuracy.

The Turtle Traders is using a trend following system that has less than 50% accuracy. They are lead by Richard Dennis.

The easiest way to improve your odds is to improve your entry. The best way to improve your entry is to get as detailed as possible with the price.

The only way to do that is by playing with the lower time frame like the 5 mins or the 1 min.

You can’t make a better judgment and a bigger paycheck if you rely on the current time frame to make your move.

It’s down to the 5 min chart and improves your entry and get reasonable returns.

One Final Part

Market orders are good only if it’s accompanied by a volume in price.

However the underlying volume below the bear candle doesn’t give me a valid reason to jump in.

Always and with no excuse only open a limit order.

It gives you time to think and sometimes the market might reverse without hitting your order.

How To Find Support And Resistance In Day Trading

The time frame a day trader has to deal with is the hourly and the 4 hours. Anything below is just a tool to improve upon. This could be the entry or the exit.

If you are unsure of the next level. A trailing stop is useful and you can enjoy trend following and practicing patience.

I hope this post has helped you to understand how support and resistance levels work in the Forex market.

I want you to start thinking like I do like other professionals do.

Where are you in the trading process right now? Let me know where you are now and how you’ll take the next step.

Drop your answer in the comments.

Comments

  1. Is it possible to give more details on identifying crucial support/ resistance as i am more of a swing/ day trader and i use pivots level to trade but sometimes the result is very good but sometimes i keep losing…. any advice from you?

    • You have two types of entry. Limit order or signal order.

      Limit order is like in an uptrend market. Price rises and dip. You place a limit buy order to catch the falling knife. If you are lucky and the market take your order and reverse before hitting your stop. If you are not lucky and the market plunges through your stops that’s where signal order comes in. You monitor price behavior and look for weakness like a double bottom on a lower timeframe or strength.

      My definition of support is where a bear candle appears followed by two bull candles. However this is not definite as I need to see if there are previous resistance or support that coincide with this level. The lesser the better. Preferably one or two touches. If there are too many overlaps. Nobody is paying attention. Don’t bother.

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