Support And Resistance Plot Them 100 Correct

Have you ever wondered what support and resistance levels really are, or why traders even bother about them at all? How to actually plot your own support and resistance levels CORRECTLY and knowing when a support level becomes a resistance level or vice or versa?

In this article we will help you decipher support and resistances once and for all. So that you may approach plotting them confidently and competently – after all this is the one topic you must master as it forms the foundation of all things technical analysis in the forex market. Lets get started.

What is support and resistance?
Think of support and resistance levels for what they really are, supply and demand zones.

Supply refers to the availability of a certain currency at a specific price.

Whilst demand refers to the desire for a specific currency at a specific price.

In the article, what is forex trading, the concept of fiat currencies is introduced. What this practically means is that currencies are no longer backed by natural resources, they are invariably floating.

So what holds these currencies together from moving indefinitely in one or the other direction?
The large financial institutions and the big banks that participate in the forex market. Operating off the principles of SUPPLY and DEMAND. As we go into detail in the article: Forex currency pairs, the currency prices that you see changing value around the clock are all subject to the principles of supply and demand.

So how does supply and demand affect support and resistance levels?
When the price changes there are occurrences whereby the price will “bounce” off certain price levels or zones.

What this tells you is that the market makers (banks and large financial institutions) are indecisive about the direction of a specific currency pair at a specific price level. This inadvertently is what forms support and resistance levels. It is the indecisiveness of bulls and the bears within the market, the balance between availability (supply) and demand for a currency pair that forms support and resistance levels.

Before we delve into plotting and identifying support and resistance levels it is important to discuss what we refer to when we say bulls and bears in the forex market.

Read more about Range and trend, Forex indicators and Forex candlestick patterns.

Bulls vs Bears

Every currency pair has market makers who are speculating that the price will increase/decrease and are positioned on the interbank market as such. Investopedia has a great video on bulls and bears here.

The bulls are responsible for increasing the price of a currency pair. Whilst the bears are responsible for decreasing a currency pair price.

Find more valuable resources here.

Key to remember that both Bulls and Bears trade the forex market for the same reasons as you do, to make money.

The market makers hedge in the forex market, meaning at any given time a big bank has a percentage of buy and sell orders for a specific currency pair running simultaneously.

This ensures liquidity and maintains the supply and demand. This is done by all market makers collectively and in essence is what moves the currency price.

Note: You, as a retail trader, do not affect market prices as you trade, only the large financial institutions (market makers) are responsible for this.

Let’s look at a few charts and how to plot support and resistance levels effectively.

This is a snapshot of the AUD/USD chart on the 4 hour time frame.

Plotting support and resistance levels
Support and resistance levels are zones, to plot a support and resistance level, you need a minimum of two points. How are these points plotted?

Plotting support level:

This is done by plotting from the region of a lower shadow also know as a the wick. To the region of the of the second shadow. To learn about candlestick patterns click here.

Zooming closer in

Looking at the image, you can see that the support level is formed from ZONES (blue blocks). Therefore joining two support zones together, andDONE!!! You have a support level.

Plotting resistance levels:

This is accomplished by plotting from two upper ZONES as seen in the image below.

And, done, you will have your resistance level

Now that you are familiar with the mechanism of plotting support and resistances, The question may arise are all support and resistance levels created equally?

The short answer is No!

In reality support and resistance levels are categorized by their STRENGTH. Which literally refers to how relevant a level has been in the past.

This relevance is determined by how often a zone has held without being broken through, in the past.

Think of support as a floor and resistance as a ceiling, of a room.

Imagine price action as being a ball that bounces off these levels. A strong floor would be a floor in which when price (ball) bounces off it, the price returns back up into the room. On the other hand a strong resistance (ceiling) would be a price region, that when price bounces off it, then price would return back down into the room.

* A Minor support or resistance is a level that is considered very weak (These are characterized usually by less than 2 points before being broken).

* A Major support or resistance is a price level that is considered to be very strong (These are characterized by at least 3 points “bouncing” off these levels)

Does this means that buying at a major support level and selling at a major resistance level, will increasing your chances of making money in the market?

YES!

BUT hold up.

Every trader in the world knows that. More importantly all the market makers know that is how you will be thinking. So simply applying that information above will not be helpful in creating a strategy that will last over the long run. Read the article: Developing a Forex strategy, designed to assist you in developing robust and lasting strategies in the forex market.

Types of support and resistances
The types of support and resistance are defined based on the market conditions, under which they are draw. When the market is ranging – meaning that price has not yet taken a definitive direction, then support and resistance levels will be horizontal in nature.

If the market is trending, then the support and resistance levels will also follow the trend. The principles of major and minor support levels remain the same. Learn more about range and trending markets.

What happens when your support or resistance zone gets broken?
Primarily one of 3 things can occur:

1. The price breaks through the level and continues in the direction of the break. This is known as a breakout

When this occurs, the support or resistance levels becomes old and they lose their relevance in respect to the current market price. Remember that support and resistance levels can always change and the more relevant the level the higher its impact on the current market price.

2. The price could break out, and come back and retest that level and then continue in the direction of the breakout.

Whenever this occurs, it provides insight that the broken level now potentially becomes opposite of what it was (A support level become a resistance level) and/or – vice or versa.

3. The price could breakout very briefly and quickly return back within the bound of the support and resistance, this is called a FALSE BREAKOUT.

This generally occurs around major levels of support and resistance. Remember if all the retail traders think alike, the way that the major financial institutions can profit from this herd like behaviour is by quickly collecting the orders and then proceeding to move in the intended direction. In essence eliminating the so called “easy money” from the market. It is for this reason amongst others that very few retail traders, like you and me,make money in the forex market. The value ranges from various sources but it is believed to be anywhere from 5-10% of retail traders who make any sort of long term financial gains from trading currencies.

On that note,

Drawing support and resistances does take time to perfect, but with this guide and a little practice you will be able to acquire the skill and be better equipped to trade the forex market.

For more valuable resources click here.

Happy Trading