Using support and resistance in the most effective way, if not, I'm gonna show you how it's done.
Now, support and resistance really is the most basic and common form of technical analysis that's out there today.
Certainly one of the simplest to understand.
It's possibly why it's one of the most effective approaches that many traders use in the markets today.
But what I found over the 30 years or so that I've been trading certainly, the last 15 years since I've been on the screens, is that a lot of traders don't really know the best way to apply the theory of drawing support and resistance lines on their charts.
Now, we've all read the books in the past that say that these lines should be drawn where price has been expected twice in the past.
But I'm not really sure whether that is the best approach.
In a few minutes we're going to get onto the chart, so I'm going to show you exactly how I would draw support and resistance on my charts.
But before we do, let me just give you a little definition of what support and resistance is- they're basically horizontal lines.
Horizontal lines drawn on the chart where price and therefore human nature has reacted in a certain way in the past.
Now, us as human beings.
We have this inbuilt processor that likes to repeat itself.
We do the same things on a daily routine because we did it the day before.
We have Christmas every year because we had Christmas last year.
Now this same human nature, the same new human nature and approach that you see in everyday lives is reflected in the price charts, as well.
Support basically is a horizontal line drawn where buyers overcome the sellers.
So if the sellers are moving the markets down buyers start to overcome the sellers and the trend starts to reverse.
Okay? And push the trend back up in the direction from which it came.
Now, Resistance found above support will be where the sellers come into the market.
And the sellers start to overpower the buyers and therefore push the market back down to where it came from.
Now it's important to note that drawing support and resistance lines, it's not an exact science.
It takes a lot of screen time and there's various rules of thumbs that you need to follow.
It's also important to note that the support and resistance lines, they're not insurmountable levels, if they were then clearly they wouldn't be trends developing in the markets.
These support and resistance lines often challenged and sometimes broken in the case of trends.
And it's this challenging period where we look to get into the trend if you like to follow that trend higher or lower indeed.
Now, there's two major types of support and resistance lines.
And I like to classify these as the “minor” and the “major”.
Now the minor support news distance lines are basically where prices pause.
Pause in a longer-term trend and these pauses give us the potential entries.
Often find the minor, support and resistance lines on the lower timeframes like that the 15-minute, the one hour, the four hour and so forth.
Now the major support and resistance lines levels.
These are find found on the higher time frame charts like the.
daily even the monthly more powerful out there as well.
So these major support and resistance lines.
These can indicate key reversals, key reversals of trends, again on the higher time frames.
So now we're going to get onto the charts and I'll show you exactly you know how I draw these on my charts in the minor and indeed the major levels.
So when I first look at a price chart in order to plot support and resistance, I like to take the top-down analysis approach.
So basically I look at the higher time period and then work my way down to the lower time period.
Plotting the support and resistance as we go using different colored coded lines.
So that I can easily identify which particular time period of that support or resistance line was relevant to.
Now most of us when we look at a price chart, will look at a candlestick chart.
Candlestick charts shows us lots of information as you know.
So you've got the main body of the candlestick and the wicks by the side.
Now the main body of the candlestick shows us where that particular candle opened.
Where it closed.
price traded in that time period.
And the lowest price.
Now that's all very well.
Lots of great information on there.
But not all that information is that relevant when plotting support and resistance.
Certainly as you go out to the higher time periods.
For example, we don't know if this high up here, we don't know if that was one trade.
One small trade in the thin market.
We don't know if that was a flat finger.
We don't know if this low down here was just one trade in thin liquidity.
So it's not really showing as much information.
What we want to deem from the price chart is who had control of that time period.
Where the buyers in control? Where the sellers in control? Showing us where the open was, doesn't really give us an indication.
What's important is the closing price.
The closing price shows us who on balance, one that particular time period.
Who was the stronger of the two: the bulls or indeed the bears? So quite frankly, we don't need to see all this information this information is not that relevant.
What's relevant is this closing place.
So when plotting support and resistance I like to focus more on the closing price than anything else.
Now the best way to do that is the use of a line chart and that's exactly what I'm going to do and show you now.
So this is the line chart on the euro dollar one month.
Now, what we're looking for we're looking for key turning points.
I'm not looking for the weaks or the highs and the lows.
I'm looking for key turning points of these lines.
You'll see there's turning points there, there's turning points there, there indeed.
Indeed back down here as well.
So we're looking for these key levels for our support and resistance.
And what we do we draw our support and resistance lines through these levels.
Now for the sake of this presentation, I'm just going to draw a few and of course this is on the one month as well.
So some of them are going to be quite far away.
But you certainly put one in there.
I'm going to be using a red line for the monthly.
Okay, and I'll be using a different colors for the different time periods.
So we'll put another one in there and potentially another one in there as well.
So I like to use even coding, the red will be the monthly, the green will be the weekly, the daily will be the purple.
Ff course you can choose whichever you wish as well.
These turning points are key, key levels drop another one in there as well.
And when you go back to the candlestick chart , you'll see how important they are as well.
They ignore the weaks, they ignore this noise.
It shows us where the consensus was in that particular time period.
Now we've done the one month.
We're going to go down now and have a look at the weekly chart to chart a time period below.
So now we're do exactly the same on the weekly.
I'll be using a green line to plot my turning points on the weekly chart.
There's a turning point there.
Certainly one back down here as well.
Certainly a few back down here.
Now for the sake of this presentation I'm not going to go through them all of course.
We go back down quite a few points on that as well.
Once we've done the weekly, will drop to the lower timeframe which will be the daily and we'll do exactly the same.
Purple line goes in there.
down there as well.
Hit there twice.
Again drilling back to the candlestick charts.
You'll see how important these lines are.
Okay? They ignore the weaks.
That's where we closed much more significant, as you will see.
And we just keep going further down.
Now looking at the 4-hour chart.
Now I'll be using the black line for my 4-hour chart.
And it is as simple as that.
Now once you've done that, you can safely go back to the time period that you're looking at.
Possibly the one-hour chart and start trading away.
Now on this line chart, on this chart.
You will see the clearly marked levels of support and resistance, relevant to all the time periods.
Ignoring all the weaks.
We're looking at all the time periods.
Of course you can always scroll out to look at a particular period if indeed it becomes relevant.
If it's a monthly you want to see price action even we scan out and look at that.
But drop plotting your support and resistance lines levels using the line chart is a far easier way to see the levels in with much much more clarity and much more accuracy.
You see here this 4-hour chart here.
It's being expected number of times and indeed both at the bottom as support as well.
This all support potentially now.
It's going to act as a resistance on the way up.
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