Hello and welcome to another edition of the bulls and the bears. A long while back we learnt How to Identify Support and Resistance Levels. What we failed to learn was how to draw support and resistance levels on the price action charts before trading on the forex market. Basically we are going to learn how to carve out support and resistance levels on the price action charts before trading on the market. This is something you should do at least the day before you trade on the forex market
.You want to identify potential trading zones among these key levels before placing your trades. Before we start today’s lesson let me sound a cautionary note to you all . Drawing support and resistance levels is not magic. It’s not a situation where price automatically hits a support or resistance level and then breaks out. Sometimes the levels that you draw may turn out to be the wrong ones as you trade live. The actual levels may be above or below the levels that you drew. And that could cost you dearly in your trading account.
You may struggle with drawing these levels at the beginning but once you get the hang of it, drawing these levels will be second nature for you. So basically we are going to learn how to draw support and resistance levels properly before you trade. This is the surest way of avoiding tsunami -sized craters in your account.
Look For the Next Significant Support and Resistance Levels
Your first task at hand is to look for the next significant support and resistance levels. Let me sound another cautionary note. Just because you are drawing support and resistance levels does not mean you draw all support and resistance levels that you set you eyes on. That will cause you to pull your hair out. Even worse, you may miss out on some hot trades. Just draw a few lines that clarify things as to what’s happening on the charts.
How Do We Do This?
Just draw one support level below the current price and one resistance level above the current price. Don’t worry too much about pinpoint accuracy. Just draw it at a place that makes sense to you. We’ll deal with accuracy later, Let’s look at an example using the EUR/USD pair
As you can see the market is in a trading range or closing sideways. The area between they support level and the resistance level is what we call key levels. Within this range are short terms that are significant but less so than the key levels we just discussed. See how the resistance level are the very top hits the huge bearish bar but rips through the bodies and middle tails of the other bars
This brings up a crucial point. That a support or resistance level can be significant even if it isn’t touching highs and lows. See how this point is further illustrated as some of the highs and lows don’t even get a massage let alone a touch. In this scenario you could say more of an zone than an a key level. In fact it’s more like a small zone .
For more information look up A Closer Look at Price Event Zones and Support and Resistance & Levels
Check If There Is Enough Price Rotation Around That Level
Yes you need to examine whether there is enough price rotation around that key level. The best way to find out is to check how many times price has touched that level.
Now the shaded price at the key support line represents the current price and the shaded price at the resistance level represents the current price at that level,
Like I said don’t worry about accuracy. Just make sure it the logic behind your selection makes sense. I can hear you asking”Now How Do I Know It’s A Major Level?”
ak your key level slightly to accommodate as many hit as possible from price both above and below the line. Now let’s take a look at the price action of the above graphic again . As you can see both lines are nicely drawn. Price attacked these two lines several times and they rarely flinched. This means both lines are significant levels and they have serious backbone.
Now price might hit your lines more than you are willing to accommodate. Occasionally price might break out just to take care of pending market orders.
However, There is one breakout formation you need to keep an eye on. And the name is of this formation is simply called :
I can hear someone asking”Does it look like the human elbow?” Sorry! You got it wrong. Basically it’s a rotation point where a key level resists price’s onslaught such that price falls on its back.
Now it will be ill-advised to trade elbows by themselves. But if your drawn lines fall on these elbows, that’s your green light to put in your market order. Now let’s take a look at what the elbow looks like Here the elbows are shaded green. And they are located in two places. The first is in an uptrend and the second is in a range. And like I said, earlier they also act as support and resistance levels- assuming your lines falls on these levels. Let’s take a look at another elbow. Here keep an eye on the full body and long skinny wicks of the candlesticks. The lines seem to be cutting through more wicks than full bodies. But I suggest you put more weight on the bodies than the wicks for purposes of peace of mind later on. If you want to brush up on your candlesticks look up Fundamentals of Reading Candlestick Patterns. Next up is:
Examine Previous Price Action
You absolutely need to examine previous price action to see whether those key levels make sense. Now when we say previous price action we are referring to historical price action in the past.
Now I’m not saying scroll all the way back to price action of twenty years ago to do your analysis(That’ll take you the rest of your life). Just go back to price action ranging from a week to a month previously. The price action data should be fresh enough for you decide whether the current key levels still make sense. Let’s take another look at the price action of the EUR/USD pair The data for from August to September seems pretty solid, Consequently it means the support and resistance lines pass the test. It also give you confidence to know that you’ve the right support/resistance lines at the right places.
However, price changes with time. Consequently your historical data may be out of sync with your support and resistance levels. But with practice and a little practice you should be able to recognize the key levels like the back of your hand.
Use The Same Process To Find the Next Set of Support and Resistance Levels
Now we’re going to use the same process to find the next of support and resistance levels. They will definitely come in handy when you are looking for solid profit targets or stop loss levels. Now let’s look at the new levels in the EUR/USD graphic. is This is what the next support/resistance levels look like. However, the next major levels are fairly close. There is not room for maneuver. So you may have to sit tight and wait for price to react on the outer lines rather than the inner lines before you put in your trade entry.
That’s a wrap for “How To Carve Out Support and Resistance Levels On Price Action Charts Before Trading On The Forex Market.” I assume everybody has gotten the hang of drawing support and resistance levels. The only way to perfect this is in live trading conditions. Practice till it becomes second nature to you . Then you can predict where price will hit at that level. Support and resistance levels can be reliable places to enter trades and set awesome trade profits.
So long as you draw the key levels properly, you’ll accrue huge profits beyond your wildest dreams However drawing key levels is not an exact science. What you need to look for is your trading edge. Support and resistance levels help you give you that edge. If you want to watch price action of event zones run at the speed of light look up Identifying Dynamic Support and Resistance Levels. Til next time take care.
Opening Of Live Forex Trading Account
If you’re looking to open a live trading account sign up with EasyMarkets.