Drawing Support and Resistance Lines

Have you ever seen a currency pair rise in price, stop rising, and then bounce back down from the same level, repeatedly? If so, you've just seen support and resistance in action. These invisible lines are the building blocks of technical analysis, helping traders locate potential entry and exit points.

However, the key difference lies in knowing support and resistance exist and learning how to draw them correctly. If you draw them correctly, your charts almost take on a life of their own. If you draw them incorrectly, they could practically be noise. In this article, we will go through, step by step, how to confidently draw support and resistance lines and, more importantly, how to use them to develop better strategies.

What Are Support and Resistance Lines?

• Support is a level where price tends to stop dropping and more often than not rebounds upward. It acts like a floor, built by the choices traders have made.

• Resistance is a level where price tends to stop rising and, in many cases, reverses downward. It acts like a ceiling and will not allow the price to move any further.

These levels, if correctly drawn on the charts, can help traders visualize where the market sentiment may change.

Why Drawing Them Correctly is Important

Support and resistance lines are not just for aesthetics; they inform decisions made by traders. Traders use them to:

• Identify high probability entry points.

• Put stop loss orders at safer locations

• Identify possible breakouts or reversals.

• Create confidence in their market analysis.

An incorrectly drawn line, however, can give you a false sense of security and possibly lead you to take trades without regard to what was transpiring in the market.

How to Identify Support Levels

1. Look for Repeated Bounces: If the price has touched a level and then bounced, it is probably a valid support.

2. Check Historical Lows: Previous dips tend to act as floors in the future.

3. Take note of Psychological levels: Round numbers (like the 1.2000 on forex pairs) tend to gather strong buying interest.

4. Volume: A bounce where volume is high is usually more substantial support than volume on a low bounce.

How to Identify Resistance Levels

1. Look for Repeated Rejections: The price is running into resistance if it has a hard time moving above a level.

2. Check Previous Highs: Previous peaks tend to help form new instances of resistance if price returns to that level.

3. Look for Round numbers: Just like it helps identify support, psychological levels tend to become new ceilings as well.

4. Confirm with Price Action Patterns: Resistances tend to create patterns like double tops that traders will find on charts.

Horizontal vs. Dynamic Lines

•Horizontal Lines: The price is static and does not move over a period. They can be drawn very easily (pick a zone where price has reversed 3-4 times).

•Dynamic Lines: These lines move with the market, like trendlines or moving averages. To draw your dynamic support locations, a simple line connecting higher lows would give you what is called dynamic support. Further, if you connect lower highs, you'd see dynamic resistance.

Recognizing the distinction between static levels and dynamic levels provides traders with flexibility in analysis as the markets change.

The steps of drawing support and resistance lines

1.- Change to a higher timeframe: Start right off with the daily or weekly charts. This will give you an overview of the most critical, higher timeframe levels for your analysis.

- Map out significant Highs and Lows: These will be your most probable levels of support and resistance.

- You'll refine those highs & lows on lower timeframes: Ideally, you'll start to determine these highs & lows on the four-hour timeframe.

- Draw zones, not perfect lines. Price very rarely reacts to a literal pip. You need to think of support and resistance as areas, not razor-sharp levels.

- Test those lines. Over time, you will recognize how price reacts to these levels.

Making Use of Support and Resistance in Your Strategies

Bounce Trading

Bounce Trading is when the price touches a level and reverses. At that moment, a trader can enter a trade in the opposite direction of the touch (i.e., buying at support or selling at resistance).

Breakout Trading

When a price breaks out of a level by a substantial distance, it is a signal of strong momentum. At that point, traders will enter the trade in the direction of the breakout.

Role Reversal

Once changed, support becomes resistance, or vice versa. This "role-reversal" is one of the strongest signals for traders to be aware of.

Confluence with indicators

Adding support and resistance levels to integrated indicators (e.g., RSI and/or moving averages) will help filter false signal actions (a signal confirms).

Common Mistakes in Drawing Lines

•  Breaking levels: Don't break a line to make it fit in places where the market does not show signals.

•  Too many lines: Clutters your chart with sloppy signals. Keep only the most obvious/training signals.

•  Ignoring other timeframes: if you are looking at a level from a time frame down on the 5-minute charts, it is not respected meaningfully as, say, a daily timeframe.

•  Wanting perfection: Price may go through a line just a hair before it reverses. These will be treated as areas, not zones.

Ideas to Improve Your Line Drawing Skill-set

•  Practice, Practice, Practice: The more times you mark a chart up, the better you will become and recognize meaningful levels.

•  Look at multiple timeframes: Strong levels are very often revealed across daily levels, into 4-hour levels, and hourly levels.

•  Wait for the signal: Do not be tempted to act upon a line on its own; wait for either candlestick patterns or related volume.

•  Ease your Signals Back: Sometimes less is more. Quality, not quantity, is your aim. What I mean by that is that two or three strong levels are more valuable than 10 weak ones.

In closing

Support and resistance lines are recognized in trading as one of the easiest, but the most powerful tools in your arsenal. If, however, you can draw these lines with accuracy, it turns raw price action graphs into maps that offer small clues on the future price action ahead. Static levels of support and resistance to a trader represent spaces on the map where past trading history has shaped the market.

Dynamic levels of support move with the market trend, but support and resistance lines continue to unveil the trading history. These levels together assist traders in building the confidence to make limited trades, and they are sustainable in making decisions with structure and purpose.

As you continue to practice marking these lines, the more concise the story of the market becomes. If you can master this skill, you will no longer feel that what the market is doing is random. You will see patterns that have been there all along, patiently waiting for you to recognize them.