-Placing support and resistance (S/R) areas is in my opinion the most important skill in forex trading. We will place them based on real price action only. We are not going to use any kind of indicators.
Support and resistance areas are essentially barriers that block price movement.
Support areas block price from moving down and resistance areas block price from moving up. They do not block price every time, but have a good chance to do it.
Support area is where buyers are grouped together and wait the price to reach them. They will then start the fight to push price up. Because there are many buyers in that area there is a higher chance that price will reverse.
Let me show you the process of placing support and resistance areas. We are going to use EUR/USD H4 chart. At the beginning we have a clean chart as you can see below.
First step is to identify strongest price bounces. I have marked them with yellow boxes. Don’t mark every bounce – only the most significant ones.
Second step is to connect the bounces with horizontal lines. That is all! Very easy.
Below is an image of support area. First sellers are moving price down. Then they reach support area and price bounces up. Sellers can’t break it because there are many buyers in that area that fight back. Eventually price moves down again to test the support area once more. And again it can’t break the same level as there are lots of buyers fighting back. You can see that sellers were trying very hard as the lower wick of one of the candlestick’s is very long. Sellers were able to push price down quite a bit, but couldn’t hold their position and buyers pushed price up again.
Resistance area is where sellers are grouped together and are ready to fight. They try to stop the price from getting any higher. So there is stronger chance that price will bounce back.
In the picture below we can see 2 bounces on the resistance area. And now price has reached it 3rd time. We can’t tell 100% that it will bounce again, but it is very likely to happen. We know that there are lot of sellers ready to fight back in this zone as we have seen 2 times before.
So now we know when price reaches support or resistance area it has strong chance to react to it. We never know for sure how it reacts however – it might reverse or it might just stall some time.
When price breaks through resistance area, that resistance area could become support area and vice versa. It is still important area to look out for. Example below.
To identify S/R areas you need to look for biggest price bounces or areas in which price has struggled the most. You can’t put a S/R area based on every minor bounce or else your chart would be full of them and it would be impossible to trade. To identify S/R there doesn’t need to be multiple bounces, one big bounce is fine. Also I prefer body bounces over wick bounces, but I use them both.
Below is EURUSD 4H chart where I have placed support and resistance areas. They are represented by horizontal lines. Highlighted areas are bounces or points where price struggled. You must understand that support and resistance areas are AREAS not strict price levels. They don’t need to be super perfect. Bounces don’t have to be exactly on the same level. You can also adjust them a little when more recent data gives you new information. Remember that most recent data is more valuable – that means you should rely more on recent bounces in your price action analysis.
If you have any questions please comment below or send me an e-mail and I will answer happily.