Understanding how to plot support and resistance levels on a chart is one of the most crucial aspects you, as an aspiring technical trader, need to grasp. Generally speaking, it is also one of the first techniques that traders come across when beginning their journey. Sadly however, this method is usually quickly overshadowed by the vast array of colourful indicators offered on one’s platform, often leaving the beginner trader overwhelmed.
A support level simply denotes the floor of a market, whereas a resistance level represents the ceiling. In other words, a level of support is where downside is capped due to the buying action of other market participants. A resistance level is similar, only turned upside down. Instead of buying activity, it is the selling action of market participants holding this level firm.
Take a look at the image below. This is a daily chart of the AUD/USD pair with two neighbouring support and resistance levels attached. Very often, as you’ve probably already realised, these barriers can be subjective. In fact, it’s likely that you’ve already mentally noted different levels of interest on our chart! Unless one is using psychological levels (round numbers) or market open and closing points as support and resistance, we feel it is unlikely that one will ever fully remove this subjectivity. Be that as it may, there is a well-known technique traders can utilize to help…
Using the same chart, we’ve gone ahead and removed the levels and replaced it with a zone. See how much clearer it looks? Expecting price to react to the pip off of a level, while it does happen occasionally, will only lead to frustration and more losses than necessary. Adopting the use of a zone in place of a definite level, in our opinion, gives traders a far better chance at pinning down tradeable turning points in the market.
As far as we’re concerned, there is no definitive approach to determine whether or not a support and resistance zone has been fully consumed. Experience has shown, nonetheless, that waiting for a candle close to take shape beyond the zone has been the most effective. To demonstrate, take a look at the image below. Notice that when a reasonably sized candle closes above or below the zone, a continuation move is sometimes seen.
Unfortunately, it is not as simple as watching for a strong candle close. There are additional elements one should consider! For instance, in order to expect a continuation move (sometimes following a retest to the broken boundary giving one a nice signal to trade) to play out, we initially look for space to move beyond the zone, as in the example below highlighted with a green arrow. Price broke through and retested the underside of the zone as resistance. Note that in this circumstance there was no obvious demand seen to the left below this zone, thus allowing price to freely trade lower.
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