One of the first skills you have to learn as a price action trader is how to draw support and resistance lines (or levels as they’re sometimes called). Drawing correct support and resistance lines is no easy task for a beginner trader. Many fail to learn the skill correctly, and out of frustration scour the internet in search of an indicator which will draw the lines for them automatically. Unfortunately, there is no support and resistance indicator out there which will draw the correct lines on the chart, which means the only hope these traders have of being able to use support and resistance lines in their trading is if they learn how to draw the lines themselves.
If you’re one of the frustrated traders who can’t seem to ever draw the right support and resistance lines on your charts, read on. Because in today’s article I’m going to give you a step by step guide on how to easily identify and draw support and resistance lines in the market. By the end of this article I can guarantee you’ll be able to draw support and resistance lines like a pro, and will be able to start using them in your trading.
I just want to make it clear that the support and resistance lines I’ll be showing you how to draw in this article are not the same as the lines you can receive weekly by signing up to my support and resistance levels service. The levels in the service are based off additional variables which are not accounted for when drawing the lines I’ll be showing you today, which is why they are found at different prices to one another.
How To Identify Support And Resistance Lines
To start, I need to show you how to identify support and resistance lines on your charts, because it’s one thing being able to draw the right lines, but another thing entirely finding out where these lines are located in the first place. Determining where support and resistance lines are located is quite a simple process, although it’s one which can be difficult if you have no knowledge of how support and resistance lines work.
For those of you who don’t know, support and resistance lines are points where the market has a high probability of reversing. The reason they have a high chance of causing the market to reverse, is because the lines themselves are calculated from the points where the market has reversed in the past. The idea is if the market has reversed multiple times from roughly the same point in the past, then it has a good chance of doing the same in the future. (You’ll see why later on)
This means all we need to do to identify where support and resistance lines are located in the market, is look for the points where multiple reversals originated from similar prices to one another.
You can see that each of the reversals above originated from prices which are quite close to one another. This tells us that a support line must be found somewhere close to where these reversals started, because in order for a support line to actually exist in the market, multiple reversals must have originated from similar prices to one another.
Again, each one of the reversals you see here started from similar prices to one another, which means there’s a resistance line around here which we can locate and draw on our charts.
Now that I’ve show you a couple of examples of how to identify support and resistance lines, what I want to do next is run you through the process you have to go through to determine where each type of line is found. Because although you find support and resistance lines in the same way, whether or not a line is a support line or resistance line depends solely on where the reversals have formed in relation to the current market price.
How To Identify Support Lines
Finding out where support lines may be located in the market is simple, all you have to do is mark the points where all recent reversals below the current market price have taken place. Marking these points will make it easy for you to spot where potential support lines lie, because you’ll be able to see where multiple reversals have taken place from similar prices to one another.
Note: The red line represents the current market price.
Just from looking at where these reversals have formed, you can already start to see that some originated from a price close to that at which a previous reversal had taken place from in the recent past. We know that multiple reversals beginning from similar prices to one another below the current market price must mean the existence of support lines, so our next task is to mark lines through the reversals which originated from similar prices, in order to get an idea of how many support lines we can draw from this segment of price action.
You can see that in total there are 7 lines, which basically means there’s 7 potential support lines we can draw in the market. When you draw the lines through the reversals like I have in the image above, you want to make sure that you try to incorporate as many reversals as possible. By that I mean you need to get the lines to touch as many reversals as you can, even if it means going through the body of the reversal candlesticks themselves. In the image you can see some of the lines I’ve drawn do not touch all the reversals I’ve marked, but they do go through most of them, and the ones which they don’t touch are still really close to the lines for them to be considered as being part of the reversals which occurred around these points.
Don’t worry too much about getting the lines absolutely perfect. These lines aren’t the support lines we’re going to use to look for entries into trades, they’re just lines which help us see where potential support lines exist in the market. I’ll show you how to draw the actual support lines in the next section.
Let’s take a look at another example to make sure the process is clear.
As you can see the current market price is above the prices at which these reversals took place. This tells us that whatever lines have formed down here have to be support lines, because they can only form below the current market price not above. With all the reversals marked, the next task is to draw lines through the reversals which occurred at similar prices, so as to get an idea of how many support lines actually exist down here.
Similar to the previous example there are 7 reversal lines in total. The fact there are 7 lines tells us there are 7 possible support lines we can draw from this piece of price action. Again, notice how all the lines I’ve drawn touch the maximum number of reversals which took place at similar prices to one another ? Like the other example some of the lines don’t touch all the reversals, but they do all manage to go through at least 3, so always remember that when you’re drawing your lines make sure they touch at least 3 of the reversals which occurred at similar prices.
If they only touch two, go further back on your charts to find the points where more reversals took place around the same price, and then draw your levels based off where these reversals have formed.
How To Identify Resistance Lines
Identifying resistance lines is done in much the same way as the support lines we have just looked at. We first mark the points where recent reversals have taken place, and then draw lines through these points as a means to determine how many resistance lines actually exist in the market. The main difference between determining the two lines, is that we identify resistance lines by marking the recent reversals which have occurred above the current market price, not below like we do when finding out where support lines are located.
All of these reversals occurred above the current market price, which means the lines we’ll eventually draw from these reversals will be resistance lines, as they always represent points where the market could potentially stop moving higher.
Just like I showed you in the identifying support lines section, the lines you can see I’ve marked here have all been drawn so that they touch as many of the reversals as possible. Each line touches at least 3 reversals and the reversals which the lines don’t touch are still very close to the lines themselves, which means they are still considered to have been caused by the market hitting the nearest big round number as you’ll see now.
How To Draw Support And Resistance Lines On Your Charts
Now that I’ve shown you how to identify the points where support and resistance lines exist in the market, the last thing for me to do is show you how to plot support and resistance lines on your chart. Plotting the lines is easy, all you need to do is look for the big round numbers which are closest to the lines you marked through the reversals which took place at similar prices.
Note: Big round numbers are prices in the market which end with 00, i.e 112.600 ends with two zeros therefore it is considered to be a big round number.
The reason why support and resistance lines are always found to be at big round number levels is because of a phenomenon called order clustering. Order clustering is where orders, specifically stop loss orders, will accumulate around round number levels in the market. No one actually knows why this take place, several studies have been conducted but the results have not led to there being a valid conclusion as to why it occurs.
Even though no-one can agree on why orders tend to cluster at round number prices, it’s accepted that it’s a very real concept which causes a large portion of price movement to take place. The fact that orders build up at round number prices makes them a magnet for the market, because the bank traders know that by causing the market to spike through the round numbers they can execute a lot of stop orders, which will allow them to get a large number of their own trades placed at a favorable price.
Check out these two PDF’s for more information on how stop loss orders accumulate around round number levels, and how they contribute to the price movement we see in the market.
The paper linked below is definitely worth reading as it talks about how a build up of orders around round numbers actually creates support and resistance levels in the market.
How To Draw Support Lines
Drawing support lines is a three step process. You first have to have the lines marking the points where multiple reversals occurred placed on your chart, like I showed you in the previous section, then you have to mark the round numbers which are found closest to these reversals, and finally, you have to move the lines so they sit on top of the round number prices.
You can see that I’ve marked the round numbers found closest to these reversal lines on the chart as well. These round numbers are the points where support lines are located. The fact that we have seen multiple reversals originate from the point where these round numbers are found, tells us that traders must often use them as places to put their stop losses, so all we need to do now is move the lines so they sit on top of the round numbers.
Here you can see what the chart looks like once I’ve adjusted the reversals lines to go through the round numbers we just marked. These lines are now the correct support lines you will use to look for entries into buy trades if the market returns to the lines in the future.
Lets go through another example.
Just like in the previous example you can see I’ve plotted the big round numbers which are located nearest to the reversal lines on the chart. We know these big round numbers are the points where support lines are found, so our next task is to move the reversal lines so that they actually sit onto of the round numbers themselves.
Now that they’ve been moved the reversal lines become support lines, and you can begin motioning them for entries long if you see the market move back towards them in the future.
Now lets take a look at how to draw resistance lines.
How To Draw Resistance Lines
Drawing resistance lines is basically the same as drawing support lines, the only difference between the two is that instead of plotting the big round numbers near the reversal lines drawn below the current market price, we’re plotting the round numbers found closest to the reversal lines we’ve drawn above the current market price.
The fact they have formed above the current market price means that resistance lines must be found here, as support lines can only form below the current market price. To draw the resistance lines on your chart, you just need to move the reversal lines to being on the top of the round numbers.
Now that we’ve moved them to being on top of the round numbers, the reversals lines become resistance lines we can use to watch for possible entries into short trades.
Things To Remember
Before we end I just want to give a list of some things which you need to remember when drawing and identifying support and resistance lines.
- When you’re marking the round numbers nearest the reversals don’t worry if you can’t get the price tag to sit exactly on the round number itself. If it’s within 3 pips of the round number then it’s fine to mark as a support or resistance level. i.e if you could only manage to get the tag to sit at 1.11801 instead of 1.11800 that’s still fine for marking the level.
- Prices which end with 500 (i.e 1.11500) or 000, (i.e 1.11000), are the ones which are most likely to cause big reversals to take place in the market. Usually you will see the market reverse after it has penetrated between 100 or 200 pips past these prices, so make sure you always have the 500 and 000 prices marked as support and resistance lines on your charts.
- When marking the reversals to see where potential support and resistance lines are located, make sure you only mark the reversals which have occurred recently. Don’t go all the way back and mark every single reversal which has occurred from a similar price to one another, just mark the ones you can see in the segment of price action you’re viewing at that time.
- If you have a situation where not enough reversals have occurred for you to mark any reversal lines, go back to the last time some price action formed above or below the current market price and mark the reversals from there.
Although I think some of the more experienced price action traders reading this will look at today’s method of drawing support and resistance lines as being quite long winded, I can promise you it becomes a much quicker process once you’ve gown accustomed to carrying it out a few times. After a while you’ll be able to see where the reversals and round numbers are found without actually marking them on your charts, which will allow you to identify where the support and resistance lines are located a lot quicker than if you were to follow all the steps I’ve given you today.
If you have any questions about drawing or identifying support and resistance lines using the method in this article, please leave them in the comment section below.