What is support and resistance? This is a question I have received for the longest time.
I have been reluctant to focus on the topic since I thought a big percentage of the traders are privy to trading with support and resistance. However, I have come to realize that this is not the case.
To begin with, support and resistance signify important stages where demand and supply forces meet.
Prices in the financial markets are driven by excessive supply (move down) and demand (move up).
Supply is similar to bearish, bears, and selling, while demand is synonymous with buying, bulls, and bullish. These terms are usually used interchangeably on different platforms.
When there is an increase in demand, prices rise, and when there is an increase in supply, prices go down.
If supply and demand are the same, prices move sideways as bulls and bears slug it out for control. This is when the market tends to move in a range or otherwise known as a ranging market.
An area of support is simply where an asset’s (stock, currency pair, e.t.c) price tends to stop falling, while an area of resistance is where the price tends to stop rising.
However, before attempting to make any trading decisions based on those areas in a chart, traders need more knowledge about support and resistance than this simple definition.
To be able to use support and resistance successfully, you should first learn how asset prices basically move so that you can then interpret support and resistance from that framework.
You should also know that there are different kinds of support and resistance, like minor and major SR levels.
Minor levels are likely to get broken, as strong levels are more likely to hold and result in the price moving in the opposite direction. This is because when support or resistance holds, price reversal occurs.
In order to get a clear understanding of resistance and support areas, let me try and expound on them separately. Later in the post, I will even expound on how to find support and resistance levels on your charts.
What Is Resistance?
The price level where selling is believed to be high enough to prevent the price from increasing further is known as resistance.
As the price approaches resistance, logic dictates that sellers will be more likely to sell, and buyers will be less inclined to buy.
It is expected that by the time the price hits the resistance area, supply will have overcome demand, preventing the price from increasing above the resistance zone.
You should note that resistance does not always hold.
A break above it indicates that the buyers have won the fight against the sellers.
A break above resistance indicates a fresh desire to buy and/or a lack of selling motivation.
Breaks (breaches) through resistance and new highs mean that consumers have raised their standards and are willing to pay even a higher price.
Furthermore, sellers cannot be forced to sell until prices have risen above resistance or the previous peak.
Once resistance is broken, a new resistance level at a higher level must be created.
What Is Support?
The price level at which demand is assumed to be high enough to keep the price from falling further is referred to as support.
According to theory, as the price approaches support and becomes less expensive, buyers will be more likely to purchase, and sellers will be less inclined to sell.
Demand is expected to exceed supply by the time the price hits the support area, preventing the price from dropping below it.
However, support does not hold all the time, and a break below support indicates that the sellers have won over the buyers.
A decline below support shows a lack of motivation to buy or a new desire to sell.
Breaking support and making new lows indicate that sellers have lowered their demands and are willing to sell for even less.
Furthermore, the bulls (buyers) could not be persuaded to buy until the price level fell below support or below the previous low.
When one level of support is breached, a lower level of support must be created as it is with resistance.
By now, I am assuming that you understand what is support and resistance.
When Does Support or Resistance Break?
This is normally referred to as support and resistance breakout.
As a trader, you should always be wary of the “big boys” in order to avoid being “trapped” when executing your trades.
To achieve this, you ought to have the ability of identifying when support and resistance are likely to break.
It is obvious that resistance breaks in the presence of an uptrend, while support breaks when the market is trending downwards.
You should note that support and resistance are more likely to break when there’s a buildup after the market approaches the area.
For example, this can happen when the market is approaching support. Support is an area that has possible buying pressure.
It is expected that the price should therefore rise fast since it is an area of reversal. However, this is not always the case.
Most of the time, the market will consolidate around this level. The level will be tested severally as both buyers and sellers attempt to win the battle.
This comes out as a sign of weakness from the buyers as they cannot take the market further down. Sellers, in return, tend to take over and push the market to the next possible highs.
Look at the example of the ranging market below.
(Only one for the support)
The same case is experienced when the market is approaching resistance.
Be very careful not to get stopped out by way of placing trades immediately the market approaches resistance or support level.
After there are sufficient “trapped traders,” that’s when the market moves; and it moves fast since the “big boys” are able to fill their orders.
And the opposite for Resistance:
Things to Note About Support and Resistance
1. Resistance and Support are Zones/Areas
I had to put this here since most people take support/resistance as just mere lines.
This is the reason why most people trading with support and resistance get easily “trapped” or miss out on viable trades entirely.
As a trader, you can easily get trapped when the market slightly breaks your support and resistance levels, and you assume that it is completely broken.
As a result, you trade the breakout, only to realize the breakout is fake.
When it comes to missing out on trades, it happens when the market gets close to where you have drawn your support/resistance line, although not close enough.
From this area, it turns back in the opposite direction.
As a result, you end up missing the trade as you were waiting for the market to test exactly where you had drawn your support/resistance line.
These are issues that you can easily avoid by treating your support and resistance as a zone or area. This is something you should be able to clearly identify from your trading charts.
When you treat the SR as an area or zone, you will be more focused on how the market is behaving as it approaches the zones. This way, it becomes easier for you to time your trades.
Keep respecting these support and resistance zones, and you will see how your trading will improve.
2. An SR Level Gets Weaker the more it Gets Tested
I know this might sound controversial to some of you.
At some point, you might have read trading books that say that the more times support or resistance is tested, the stronger it becomes.
This is the notion I also had initially based on the information I had accrued as a newbie trader.
With time I have come to realize that the opposite is the truth. That is, the more times resistance and support levels are tested, the weaker they become.
The reason is that the market reverses at resistance or support due to the existing selling or buying pressure to push the price lower or higher.
This selling or buying pressure might be coming from banks, institutions, or hedge fund traders that trade in large orders. I normally refer to them collectively as the “big boys.”
Should the market continue to re-test resistance or support level, their orders are finally filled.
In case all the orders get filled, is anyone left that will sell or buy?
I hope you get my logic.
3. Don’t Place your Stop Loss at Support/Resistance Level
This is one of the mind-boggling mistakes that I see most traders make.
I think it only takes a few trades for any serious trader to realize that placing your stops at the resistance and support level is a very bad idea.
The big boys will be waiting for you to do that so that they can “stop hunt.”
This is why you will always see traders say how every time a trade takes them out, then it starts moving in their desired direction.
It is very heartbreaking when you do everything right and end up losing money due to your poor stop loss placement.
You can avoid this by allowing the candle to close beyond support/resistance or place your stop loss some distance from support/resistance ( I always advocate for this).
Allowing the Candle to Close Beyond Support/Resistance
Going with this, you can only enter your trade when the price closes above the high of the resistance or low of support.
From my experience, I have realized that the market moves more after numerous retail traders are stopped out by the big boys.
You should learn to take advantage of this.
Setting the Stop Loss a Distance from Support/Resistance
You can use the Average True Range (ATR) indicator to do this. Though you should note that this is not a support and resistance indicator.
I think this might be the only time you will see me recommending an indicator.
I am doing so since I regard ATR among the best indicators that I have encountered before. Actually, it is the only indicator that I am currently using.
You can apply the Average True Range by
- Identifying the high of resistance or low of Support
- Getting the ATR value
- Taking the high of resistance or low of support minus the ATR value
4. Support or Resistance Enhance Favorable Risk to Reward Ratio
The grave mistake that some traders make is entering trades when the price is very far from the resistance or support.
This will always give you a poor risk to reward ratio as it requires a large stop loss. When you allow the price to come to you, however, you get a tighter stop loss, and this boosts your risk to reward ratio.
Always keep in mind that in trading, patience is important, and it contributes significantly to your success or failure.
Never be in a hurry to chase the market; it will always come to you.
How to Draw Support and Resistance Areas
You can easily learn how to draw support and resistance by following some simple steps.
Step 1: Choose your preferred chart type
This is the most basic move, and it should not be difficult at all. All you have to do is open any chart and choose the kind you want.
For me, I use candlesticks, but you can use whatever you want or that which suits your trading strategy.
However, I don’t even think I should even be talking about this since if you are already trading, you already have a particular chart type that you are using.
Step 2: Take note of all swing lows and highs
Now it is time to mark all of the highs and lows on your chart.
It’s possible that you’ll have to scroll backwards a little depending on the timeframe on your chart.
Go ahead and draw a line across any high and low you see.
The lines do not have to be at their absolute lowest point.
The most important thing is to draw a straight line through all of the highs and lows. Just note that it should not be overly subjective.
The benefit of this move is that you will be able to quickly decide whether the market is trending or not, and you will be able to see the highs and lows.
Step 3: Link the highs and lows by drawing lines
Linking the highs and lows you found with horizontal lines is the final step in drawing support and resistance zones.
Those will now be your core areas of support and resistance.
There’s a good chance the lines you draw won’t exactly correspond to the lows and highs you outlined earlier.
That’s perfectly normal; accept it. Add a horizontal line if you think you can bind two highs/lows. When a line connects more than one high or low, it becomes even more relevant.
You can be sure that the lines show consistent support and resistance zones once you’ve finished this phase.
You can always make changes to your lines, but it isn’t important.
In conclusion, I am now confident that you know what is support and resistance, and also have a good grasp of how to trade support and resistance.
Support and resistance trading is one of the easiest ways to trade the market, though you ought to have other confluence factors to consider for effectiveness. Try to implement the points I have outlined above, and you will surely see an improvement in your trading.