Support and resistance: an introduction

Before reading this lesson, you should have previously read through:

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Support and resistance levels

Support and resistance levels are key prices at which buyers or sellers have previously entered the market in enough quantity that they halt or reverse the price movement. These price levels are used by traders to identify where buyers or sellers are likely to enter into the market again.

They can be identified on price charts with horizontal lines where the price will come to a halt at the same level a number of times.

Resistance

The chart below demonstrates that if price is moving higher, it will eventually hit a "ceiling" — a point at which the price stops and reverses.

Resistance

This is where sellers are entering into the market. They do so in such sufficient quantities, that they overpower the buyers and stop the price from going up any further.

When price is moving higher and hits a ceiling multiple times at the same level, a point at which price stops and reverses, this is resistance.

When this happens, a resistance level has been identified where the price is likely to halt under selling pressure.

If the price works its way back to a previously established resistance level, sellers are likely to enter the market causing the price to stop at this level and reverse.

Resistance levels can therefore be used to enter into new short positions or as a profit target level to close current long positions.

Support

The chart below demonstrates that support identifies a price level where buyers are entering the market.

Support

If the price is moving lower, it will eventually hit a “floor” where buyers enter the market in such sufficient quantities that they overpower the sellers and stop the price from going any lower.

When price is moving lower and hits a floor multiple times at the same level, a point at which price stops and reverses, this is support.

When this happens, a support level has been identified. Support can be used in much the same way as resistance, but in this case, to either enter a new long position or to close a short position.

Identifying support and resistance levels

To identify support and resistance levels, you look at where the price repeatedly stops in the same place. This is where buyers or sellers are entering the market.

Price chart with no support or resistance lines

The chart above shows an example where price seems to rise and stop at the same price level repeatedly.

You can see in the chart below that by placing a horizontal line where the price seems to stop, it helps to identify a resistance level where sellers are entering the market and halting the price.

Resistance line

You can practice looking for resistance levels in the following exercise:

Exercise: Find the correctly drawn resistance levels Show exercise

The chart below shows an example where the price moves down to a level where it halts repeatedly and then reverses back to the upside.

Price chart with no support or resistance lines

In the chart below, a horizontal line is placed at this price level to help identify a support level where buyers are entering the market and overpowering the sellers.

Support line

You can practice looking for support levels in the following exercise:

Exercise: Find the correctly drawn support levels Show exercise

Support and resistance in a range

In a ranging market, the price encounters the same support and resistance levels several times before breaking out of the range.

Support breakout

number_1 Price finds resistance in a range
number_2 Price finds support in a range
number_3 Price finally breaks out of the range through support

As you can see in the chart above, the resistance level provides a clear upper boundary and the support level provides a clear lower boundary to the range.

A breakout eventually occurs after the sellers overpower the buyers and break through the established support level.

Placing S&R levels using wicks and bodies

The following two charts show examples of placing support or resistance lines using the wicks and the bodies of the candles. The chart below provides an example using the wicks of the candles to place a resistance line.

Resistance using wicks

The following chart shows an example using the bodies of the candles for the resistance line. There is no correct way to place support and resistance; it is a matter of using one or the other to suit the trader, or the strategy being used.

Resistance using bodies

Support and resistance zones

Support and resistance levels cannot always be precisely established with a single line; therefore it is sometimes better to establish a zone. In the chart below, you see that the price encounters resistance several times at different levels.

Resistance zone

There is no single price level at which sellers are entering the market. The sellers overwhelm the buyers at different price levels. However, what is clear is that there is a resistance ‘zone’ where the sellers are entering the market.

You can practice looking for support and resistance zones on charts:

Exercise 1: Find the support and resistance zones Show exercise
Exercise 2: Find the support and resistance zones Show exercise
Exercise 3: Find the support and resistance zones Show exercise

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Resistance can become support

Price breaks through a support or resistance level when one side has overpowered the other. When the price breaks through support or resistance, it is not uncommon for the price to come back to the breakout level before continuing on. In these cases, support can become resistance or resistance can become support.

To use the chart example below, the price broke through a resistance level, meaning that the buyers overpowered the sellers at this price.

Resistance breakout retest

number_1 Price finds resistance
number_2 Price breaks through resistance
number_3 Price comes back to the previous resistance level that has now become support

Closing a Position
To close a long position, you sell your asset back to the market; to close a short position, you buy the asset.

Those that sold at the resistance level would be taking a loss as the price continued to rise. As the price comes back to the previously established resistance level, those traders that went short would close their losing positions, bringing new buying pressure into the market.

Traders who have not entered the market yet will also enter new long positions at this price level in anticipation of a price increase and the price will continue to rise under additional buying pressure. The previously established resistance then becomes a support level.

You can practice identifying resistance levels that have turned into support on charts in the following exercises:

Exercise 1: Find the resistance level turned into support Show exercise
Exercise 2: Find the resistance level turned into support Show exercise
Exercise 3: Find the resistance level turned into support Show exercise

Support can become resistance

Similarly, if the price breaks through a support level, when the price comes back up to this level, sellers will enter the market and the price will continue down. The chart below shows further examples of support becoming resistance and resistance becoming support. The same price level in this example acts as support and resistance multiple times.

From support to resistance

number_1 Price finds support
number_2 Price breaks through support
number_3 Price then comes back to the previous support level which has now become resistance
number_4 Price breaks through resistance and then finds support once again

You can practice identifying support levels that have turned into resistance levels on charts in the following exercises:

Exercise 1: Find the support level turned into resistance Show exercise
Exercise 2: Find the support level turned into resistance Show exercise
Exercise 3: Find the support level turned into resistance Show exercise

Trading with support or resistance

You can use support levels to enter long positions. As you can see from the chart below, a support level has been established. When the price falls back to this level, it is likely that the price will rise again and so the support level can be used for entering into new long positions. The stop loss would be placed below the support level.

Enter a trade at support

number_1 Support level
number_2 Price finds support at this level
el3 Long entry after this price level successfully holds as support
sl4 Stop loss should be placed below the support level

Similarly, resistance levels can be used to enter into new short positions. In the chart below, a resistance level has been established and so the price is likely to fall when the price comes back up to this price level. A new short position can then be entered at this price and the stop loss can be placed on the other side of the resistance level.

Enter a trade at resistance

number_1 Resistance level
number_2 Price finds resistance at this level
es3 Short entry after price level successfully holds as resistance
sl4 Stop loss should be placed above resistance level

False breakouts

The chart below demonstrates the scenario where the price appeared to break through a resistance level, but it did not stay above – this is known as a false breakout.

False breakout
Considerations using support and resistance
  • Support and resistance levels are subjective; what may seem like a support or resistance level to one trader may not appear to be to another trader.
  • It is easy to see too many support and resistance levels where you would expect the price to reverse. Picking only the best ones comes with experience.

number_1 Price finds resistance
number_2 Price broke through resistance level, but did not stay above

If a trader is looking to enter into a long position once the price has broken through a resistance level, to avoid entering on a false breakout, it is better to wait until the previously established resistance level is shown to hold as support.

Similarly, if a trader is looking to enter short trades once a support level has been broken, then the easiest way to avoid a false breakout is to wait until the support has held as resistance.

Summary

So far, you have learned that …

  • … support is a price level where there are enough buyers to stop the price from falling any further and reverse the price to the upside.
  • … resistance is a price level where there are enough sellers to stop the price from rising any further and reverse the price to the downside.
  • … support and resistance levels can be easily identified by placing horizontal lines on a chart where the price seems to stop repeatedly.
  • … support and resistance may be drawn using the wicks or the bodies of the candlesticks, as long as you are consistent in your approach.
  • … support can become resistance and resistance can become support.
  • ... beware of false breakouts where the price seems to break through support or resistance, but reverses again in the opposite direction.

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  • Hi!

    The support and resistance zones "exercise 3" picture maybe not fit to the solution.
  • Hi,
    do you have any strategy with resistance and support? this article does not teach us how to enter pending order such as the beginner strategy.
  • Hi JHTAN,

    The aim of chart analysis lessons is to help you better understand the price-action, not to give you a trading system based on rules.

    Since this is not a trading system/ strategy with the strict rules (as the Beginner strategy is), the exact level that you choose for an entry is always determined by you -> you have to use discretion and all the trading knowledge that you have.

    This lesson introduces the basic principles of how traders use S/R levels in their own systems and may be very helpful if you want to learn more about trading. The best way how you can improve in chart analysis is posting your own charts to the forum and discussing them. happy

    Cheers!
  • hi,

    Do you mean we draw S/R lines on daily time frame?
    how many days for it?

    Thanks.
  • for the exercise above, what is the time frame?
  • Hi JHTAN,

    you can determine the time frame by looking at the up-left corner there is always the name of currency pair (EURUSD) and a time frame (M1 - one minute, M5, M15, M30, H1 - one hour, H4, D1 - one day, W1 - one week, MN - one month).

    Does this answer your question? If not, keep asking. smile
  • do you mean we can draw the S/R on any time frame chart? How many 'Japanese Candlesticks" we use to draw the S/R?
  • We can draw S/R by drawing horizontal line anywhere we want. It is only up to traders discretion what he consider is a S/R line and how he draws the line wink (Remember often it is not a precise level, but rather a S/R zone).
  • I noticed that software has many indicators.
    So, I think we can set software(indicator) to draw S/R automatically?
    "Placing S&R levels using wicks and bodies"
    what is the bodies represent? or how the bodies formed?
    Thanks.

    Thanks.
  • Hi JHTAN,

    I´m not aware of any predefined MT4 indicator that would draw S/R zones automatically but if you´re familiar with MQL4 programming language I think you could be able to create such an indicator . but always consider fact, that S/R levels are very subjective and you can find plenty of them in your chart. Picking only best ones comes with experience.

    To answer your question, I will cite from our How to read Japanese candlestick charts:

    "The wide part of the candlestick is called the body. It represents the open and close of the period. This means that if the chart is a 1 hour chart, then each candlestick body will show the opening price for that 1 hour period and the closing price for that 1 hour period.

    The different colours of the body tell you if the candlestick is bullish (rising) or bearish (falling). At tradimo, we have set our candlesticks to orange for bearish candles and blue for bullish candles."

    You can find more information in the lesson and I really recommend you to read all of our Technical analysis lessons. wink
  • You guys should definitley start a youtube channel and upload those videos. I always used Investopedia to learn things about the whole finance thing and these videos are as good if not better. It also a good way to attract a whole new audience who are not involved with say pokerstrategy.
  • Hey YoungTheBuck,

    Thank you very much for your compliments, they are very much appreciated.

    We have both a Youtube and twitch channel that you can check out smile
  • Hey guys, first time here!

    A question: when you draw resist/support lines on say, 1h chart... How to best approximate where the line should lie?

    Also, do you have to be consistent, e.g. you only use open/close on candles, or can you combine - close for support line, high for resistance?
  • Hi Vanan73737 and KowKain,

    first of all apologies for the very late response KowKain.
    To get to the question, you can draw support and resistance on wicks of candles or on the bodies.
    Every trader does it a little different and prefers something else.
    Also some traders don't want their levels do be broken before and some allow some fake outs and still deem the price level as a valid supp/resi.

    Regards,
    Timothy
  • Hi,
    do you have any strategy with resistance and support? this article does not teach us how to enter pending order such as the beginner strategy.
  • Hi,

    Yes we have one in our strategy section.
    You can find it right here:
    http://en.tradimo.com/learn/trading-strategies/support-and-resistance

    Regards,
    Timothy
  • Hi!
    When trading in a ranging market I should buy at the support-level right?
    Now how do I perform this trade since I can´t use "buy stop"?
    I imagine I have to use "buy limit" when I want to buy at the support-level?

    Could someone please explain this a little bit better for me please?
    I am always using "buy stop" and "sell stop" when trading and look for trends as suggested in the beginner strategy.

    Thanks a lot for any answer, this is really a great training-site!
  • Hi Qwerto11,

    yes you can set a buy limit order at the support level.
    Or buy at market when you see price is at the support level.
    The buy stop is to buy when you want to buy when price reaches a level above current price.
    And a sell stop is when you want to sell at a price lower that the current price level.
    Limit orders are there to buy when price is below the current price level and sell when your strike price is above the current price level.
    Hope this helped.

    Regards,
    Timothy
  • Yes great, just one more question:
    How come you ever wanna use buy stop then over buy limit, since you wanna buy low and sell high right?
    Or enter the market at the lowest point and exit at the highest I mean.

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