Support and resistance levels are levels on your price chart where the price had reversed in the past and can potentially reverse again in the future.
Since the price tends to reverse around such levels, it is important to note those levels because of possible trade opportunities that may occur there.
The easiest way to mark those levels is to draw a horizontal line across them.
Here are the criteria to consider when trying to identify a support or resistance level to mark with a horizontal line:
- The level should be at the extreme swing highs and swing lows
- There should be multiple price rejection at the same level
- The level has to be obvious
- The level must be recently respected or recently created
- The level has acted as both support and resistance
Extreme swing highs and swing lows
The first thing is to look for the extreme swing high and swing lows — that is, the highest or the lowest points that price recently got to and reversed.
Let’s illustrate with the charts below:
You can see on the left side of the chart the price made a downward swing and reversed after reaching a certain level.
This lowest point that price got to before reversing becomes a support level.
Let’s look at the case of an upward price swing. In the chart below, you can see that the price rose until it reached a certain level and reversed.
That highest point the price got before reversing becomes the resistance level.
See the chart:
Notice that, as the price reversed, it fell till it retested the support level and was rejected, sending the price back up again.
Thus, by looking at extreme swing highs and swing lows, we can spot potential support and resistance levels.
However, knowing a support/resistance level is not enough for making a trading decision.
Identifying a high-probability trading setup requires a confluence of at least three factors — the trend, a key price level, and a trade trigger. You will learn more about that in my trading course.
For now, let’s consider the next criteria for spotting a support and resistance level.
Multiple price rejection at the same level
Another factor to consider when trying to mark a support or resistance level is whether there are multiple rejections from that level.
A level where the price had been rejected many times is stronger than one with fewer rejections. See the chart below:
You can see that the price came down to that level on three occasions and got rejected each time, so that level has proven to be a strong support level.
See another example below, but this time, it’s from a resistance level:
Notice that the price got to that level on five different occasions, and each time it got here, it was rejected. This shows how strong the resistance level is.
Thus, for a level to be considered a strong support or resistance level, the price must have reversed from there several times in the past.
Note that being a resistance or support level depends on where the price is in relation to the level — a resistance level lies above the price, while a support level lies below it. More on this later.
Traders are always monitoring these levels to see how the price reacts when it gets to them. So, they are good levels to look for trade setups. Let’s look at the next criteria.
The level has to be obvious
A reliable support and resistance level should be very conspicuous on your charts. You can easily see that different price swing highs or swing lows ended at that level.
To even choose more significant levels, you can switch to a higher timeframe, such as the daily timeframe to see the price swings that matter.
Look at the chart below :
You can see how this resistance level is very obvious because the price swing highs are clearly seen.
Look at another chart where the price came to retest an obvious resistance level and got rejected:
Obviously, many traders are watching the level so when the price got there again, they shorted like never before and drove the price down again.
For a support level, it is the same thing. See the chart below:
You can see that the clear downward price swings and obvious support level.
See the same chart when the price fell to that level again:
You can see that the market reacted strongly at that obvious support level, as the price got rejected and later reversed to head upward again.
Note that no matter how obvious the support/resistance level is or how many times the price got rejected at the level, anything can happen when the price gets to that level.
Generally, when a price gets to a support/resistance level, any of these things can happen:
- It can get rejected
- It can break out of that level
- It can make a false breakout
There are different ways you can approach any of those situations, but for now, let’s focus on the other criteria.
The level must be recently respected or recently created
It’s better to focus on levels that were recently created or, at least, levels that were recently tested.
The market is more likely to have a memory of such levels than ones that were formed a long time ago.
See the chart below:
You can see that there are three recent rejections of this support level, so the price still respects that level.
The level has acted as both support and resistance
Support and resistance levels can change polarity, depending on where the price is in reference to them.
When the price breaks above a resistance level, that level now lies below the price and can act as a support level.
Similarly, when the price breaks below a support level, the level now lies above the price and can act as a resistance level.
See the chart below:
When the price finally broke through this support level, it turned to a resistance level when the price rose to retest it.
See another example below:
When the market broke out and climbed above the resistance level, the level turned to a support level, as the price was rejected when it fell back to it.
Identifying support and resistance is not difficult — any of those criteria is enough to identify a good level —but you need to practice a lot to master it.
While you need only one of these criteria to spot a support/resistance level, the more criteria that fit in, the better.
The support and resistance levels are only one of the tools you need to identify a good trade setup — it must form a confluence with other tools.
It’s not easy to master all you need to become a successful trader, so I can understand when you feel overwhelmed by what you have to learn.
But don’t worry; I’m here to assist you all the way if you’re ready to put in the hard work. It’s up to you to do the right thing.
You may think you deserve trading success, but if it isn’t reflecting in your trading account, then, you don’t yet deserve it, unless you do what is necessary to succeed.
What you need to do right now to deserve the trading success you desire is to get this trading course!