Forex Blog

In this quick lesson we’ll go over the basic concept of setting up your charts to trade in a support and resistance market,  then make an analysis based on your chart; which leads into developing a trading plan. We’re only going to use basic tools, horizontal lines to mark the support and resistance points we find above and below price then add a few trend lines to help see the patterns unfolding. We’ll start with a Daily chart and move to the 1 hour timeframe to trade from since the 1 hour timeframe is the closest thing to a universal chart as we can get.

First the Daily chart. What we are looking for are the recent turning points in the market and we are going to mark these with a horizontal line. The lines above price (resistance) we’ll color code red since the points above price are where we look for the market to turn short from and become selling points. The lines below price we’ll color code blue since the points below price (support) are where we look to buy at. In (figure 1) I’ve marked the closest Daily chart turning points above and below price. These are the immediate support and resistance points to price, that have proven to be a support or resistance point in recent history.

Figure 1

Now as we add support and resistance points what we want to check is, has price reacted to this same point in recent history other that the original point the market turned from. Something to note is that the markets are not mechanical entities where everything is perfect to the pip, there are times where you’ll see it almost seem magical that price reacts to within a pip a level but I assure you it’s nothing magical. The reality of this is each level should be considered a range around the actual horizontal line. The basics to understanding this is that as market orders are placed not everyone will use the exact same price some will place their orders above it some below it in a range. Add to that, that as the market moves to one of these levels it has to absorb the order flow that comes into the market which can cause overshoots as well as coming up short of the level, simply because there are enough orders placed early to this level being tested it absorbs the orders and a bounce or a rejection occurs, thus the market reverses direction; if it cannot absorb the orders around the level it is broken and price continues to move. There are slight deviations of price and charts from broker to broker that have to be accounted for…the slop I call it.

Other things we want to look for are do these levels align with previous transitional points in the market. These are the points where the market actually breaks the low or high of a previous trading period and reverses direction. We at Trade Kings Club call them Logic points. We also like to see highs of candles matched up in history with candle lows, which we like to call pivotal points. In figure 2 I’ve marked some of these points to our first 2 levels.

Figure 2

The more of these points you can find on the levels were going to place the better the chance is price will react to this point once again. What I like to set up personally are at least 3-4 levels above price and the same 3-4 levels below price. Creating a multi-level support and resistance map. In figure 3 I have skipped ahead and placed 4 levels of known resistance above price and 4 levels of support below price.

Figure 3

Thus you come up with something that looks similar to this. Now we’ve got our Daily levels set we want to zoom in a little to the 1 hour timeframe and we'll repeat the process to give ourselves a support and resistance map. These levels we’ve market on the Daily we’ll make bold lines of them now and zoom in to the 1 hour with our Daily levels set up for us. Figure 4 is the very same chart now just viewed from the 1 hour timeframe.

Figure 4

The next step is to set up our support and resistance map from the 1 hour but we need to differentiate the Daily levels from the 1 hour levels, we do this by using a different style line but the same color coding. First we want to place our immediate turning points above and below price. In figure 5 the immediate support and resistance points to price are added. Just like before we want to look for the nearest turning points in the market, the transitional points and pivotal points.

Figure 5

Now you’ve successfully created a basic support and resistance map, no help from any experts is needed any more. This establishes your heavy selling and buying points and your minor buying and selling points. Price action and learning price action is now what you base your entry’s, stop loss and target points on; which by the way is another lesson all to itself. Now you’re set and as price make’s it way to and through these levels you can simply update them as needed keeping the 4 or so above price and the 4 below.

The next step is a simple process of maybe adding your trend lines and look for confluence between your horizontal support and resistance map and the angular view from trend lines. In these next few examples we’ll apply a few trend lines, we just don’t want to over do it and add so much to our charts it becomes unreadable and confusing. Its like the old saying of “if you give people too many choices they wont be able to make one” and this is true in trading.

The simplest way to apply trend lines are to look for the last 2 high points and the last 2 low points and connect them, these will also have to moved as price moves to keep pace with price movements. We’ll use the same approach as starting from the Daily chart and mark the most recent points there and then back to the 1 hour to mark the minor points.

First the Daily chart and the most recent Daily highs and lows. In figure 6 I’ve marked the most obvious points. That’s something you should consider when placing trend lines as well as support and resistance levels and that’s “if you are not certain or it isn’t obvious that the point your using is correct or not then is usually isn’t”.

Figure 6

The larger timeframe is now set and we can move to the 1 hour and get our angular map set and can begin looking for confluence points. In this particular case with the euro there has been a large movement over 1 days trading and the lower points for a lower trend line can’t be established yet until a retracement occurs to provide one. The ones here will basically represent the same as what we have with the larger timeframe trend line. The other option is to look for median points to place your trend line. In figure 7 there is a representation of this, in the next example we’ll briefly cover looking for alternatives from previous market movements.

Figure 7

Looking for median points are just as useful as connecting you’re high and low points to look for those pennant patterns to indicate a breakout. Placing a median level or line is the same process we use to place out support and resistance levels this time we using a trend line to mark point close to price that are within its daily range.

In figure 8 are 3 examples of finding a median point where we have the same reactions as before with price highs matching with lows, transitional points, pivotal points and now these project below price the possible support points to catch retracement.

Figure 8

Now you’re all set to develop your trading plan from a support and resistance viewpoint. Simple isn’t it?

We hope you enjoyed this quick lesson on support and resistance and if you would like to learn more and join a peaceful trading community please pay us a visit and look us over at Bobokus .com

Thank you,
Jeff Sorrells (Bobokus)