Support is a price area where falling prices have stopped and turned up before. Resistance is an area where rising prices have stopped and turned down. They work because traders remember prices: orders gather where the market turned last time, so the same prices tend to cause a reaction again.
What you will learn
- How to find support and resistance from swing highs and swing lows
- How to draw a level as a zone, and how wide to make it
- Why broken resistance often becomes support, and the reverse
- How round numbers affect where you place entries, stops and targets
Find levels from swing points
A swing high is a candle whose high is above the highs of the candles on both sides of it. A swing low is the mirror image. A common test is two candles on each side, which makes a swing high the highest of five candles in a row.
Start on the daily or four-hour chart, because levels seen there are watched by more traders than levels on a five-minute chart. Mark the obvious turning points, then look for prices where two or more swings line up. A level is stronger when:
- price has turned there several times;
- price left it quickly, with large candles, each time;
- it shows on a higher timeframe;
- the last reaction was recent rather than two years ago.
Does support and resistance really work? A level marks where a reaction is more likely, and it can fail at any test. Each test can use up some of the orders waiting there, which is one reason a level that has held four times can give way on the fifth.
Draw a zone, not a line
Prices rarely turn at the exact same number twice, so a single line gets "broken" by a few pips all the time. A zone that covers the whole cluster of turns is broken far less often by ordinary noise.
Take three swing highs on the GBP/USD daily chart over two months: 1.2712, 1.2705 and 1.2719. On those days, the candle bodies closed at 1.2698, 1.2702 and 1.2700.
- Top of the zone: the highest wick, 1.2719, rounded to 1.2720.
- Bottom of the zone: the body closes run from 1.2698 to 1.2702, so take 1.2698 and round it to 1.2695.
- Width: 25 pips.
If price later spikes to 1.2716 and closes at 1.2701, that is a test of the zone. A break is a close beyond the zone on the timeframe you drew it from, here a daily close above 1.2720.
How wide should a zone be? Compare it with the pair's typical daily range on your chart. If GBP/USD has been moving about 80 pips a day, a 25-pip zone is usable. A 100-pip zone is too vague to act on, and it usually means two separate levels have been merged.
Keep only the two or three zones nearest the current price. A chart covered in lines will have a level near every candle, which tells you nothing.
Role reversal: old resistance becomes support
When price closes above resistance, the traders who sold there are now losing, and buyers who missed the move are waiting for a pullback. Both groups have a reason to buy if price returns to the old zone. That is why broken resistance often turns into support, and broken support into resistance.
Continue the example. GBP/USD closes at 1.2760, above the 1.2695 to 1.2720 zone, and rises to 1.2810. Over the next week it pulls back to 1.2722 and turns up again.
A plan for this retest:
- Buy at 1.2725, near the top of the old zone.
- Put the stop at 1.2685, ten pips below the zone, so a normal test of the zone does not reach it.
- That is 40 pips of risk. The recent high at 1.2810 is 85 pips away, so the trade offers a little over twice its risk.
If price closes back below 1.2695 instead, the breakout has failed. Price often moves sharply lower after a failed breakout, because the traders who bought the break are now selling to get out.
Supply and demand zones are a close relative of these levels. Lesson 7 covers them.
Round numbers
Traders pick round prices for orders because they are easy to remember. On forex that means levels ending in 00 or 50 (1.2700, 1.3000) and whole numbers on yen pairs (150.00). On gold, indices and shares it means round figures such as 3,000 or 20,000. Orders cluster there, so price often stalls or turns at them.
Round numbers change where you put your orders.
- Targets go just before the round number. If you buy GBP/USD with a target at 1.3000, a take profit at 1.2990 gets filled before price meets the sell orders sitting at 1.3000.
- Stops go beyond the round number, not on it. A stop at exactly 1.2700 sits with everyone else's stops at 1.2700.
- A round number inside a zone you drew from swings makes that zone stronger.
Check your understanding
Your zone is 1.2695 to 1.2720. Price spikes to 1.2716 and the day closes at 1.2701. Has resistance broken?
No. The high and the close both stayed inside the zone, so this is a test. A break needs a daily close above 1.2720.
A share CFD breaks above resistance at $150, rises to $158, then falls back to $150.40 and bounces. What is happening?
Role reversal. The old resistance at $150 is now acting as support, because sellers who were caught out and buyers who missed the first move both want to buy near it.
Why place a take profit at 1.2990 rather than 1.3000?
Orders cluster at round numbers, so price often stalls just before them. Setting the target ten pips short means you are more likely to be filled before the crowd of sell orders at 1.3000.
Key points
- Support and resistance come from swing points where price turned before. Several clear reactions on a higher timeframe make a level stronger.
- Draw zones from wicks and body closes, and keep them narrow compared with the market's daily range.
- Only a close beyond the zone counts as a break. A wick through it is a test.
- Broken resistance often becomes support, and broken support becomes resistance.
- Place targets just before round numbers and stops just beyond them.
Next lesson: Find the trend and draw trendlines
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