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Monday, May 26, 2014

How To Draw Support and Resistance Levels Like A Professional -2

Here’s a good exercise for you to work on: When marking support and resistance levels on your charts, mark the longer-term “key” levels first and then draw the shorter-term levels. This will work to give you a framework for the current market conditions and gives your analysis some routine as well.
One of the things I often write about is support or resistance “zones”, as often a support or resistance is not really an exact level but more of a zone. In the example below, we can see a very good example of a resistance zone that occurs between about 1.6270 and 1.6310.
“Key” support or resistance levels are generally levels that price rejected forcefully and that gave rise to a significant move up or down, or they can be levels that have contained or supported price many times. Whereas, shorter-term levels give rise to smaller movements and tend to break easier. We can see good examples of both in the GBPUSD daily chart below:

In this example we are looking at the AUDUSD daily chart and we can see currently the market is in a large trading range between about 1.0612 and 1.0175. We classify 1.0612 as “key resistance” since it has caused significant turning points in the market and held on the last two tests. Similarly, 1.0175 is “key support” because it has led to significant turning points in the market and held on about the last 4 tests. The shorter-term level through 1.0410 is clearly significant, but again it’s not “quite” as significant as the two levels just mentioned. As you can see, some of drawing in your levels and deciding which is more important than the other can be left up to your own interpretation, but at the same time you should have a logical line of reasoning such as “this level has held price more times”, or “that level created a larger move”, etc.

In the USDJPY example below, we are looking at all “key levels” because I did not see any that I considered to be short-term levels. The reason being, every level I’ve drawn in has created a significant turning point. The USDJPY most recently has been breaking higher, and if the resistance near 80.37 gives way we will likely see another leg higher.
Of special note in this chart are the bar tails or wicks. Note how some of the levels are not drawn exactly at the bar highs or lows but rather through the middle portion of the tail. This is important, and it’s one of the myths I mentioned at the start of this lesson; you don’t always have to draw your S/R levels exactly at a bar high or low. In fact, it’s more important to have a lot of tails touching a level than it is to have a level exactly at two or three bar highs or lows. An example of this is the level at 78.79 in the chart below; note how I drew it through as many bar tails (or wicks) that I could, rather than moving it further up and just hitting the exact highs of a couple bars. Drawing your levels in this manner gives you a better reference point to look for signals from since you are getting closer to the mean or average turning point price in the market, so it’s basically a higher-probability level than a level that’s further out but exactly at a bar high or low. That’s not to say you will never draw S/R levels at exact highs or lows, because you will, a lot, but it just means you don’t always have to draw them that way and won’t always want to.

In the NZDUSD chart below we want to take note of what I refer to as a “value area”. Now, what I mean by “value area” is basically just an area where it’s obvious that price “likes” to be. This is essentially just another word for consolidation, since an area of consolidation on a chart is essentially where a market has found “fair value”. These value areas typically act as support or resistance zones, and this means when price retraces back to them you can watch for price action trading strategies forming at them. You will also sometimes have existing support or resistance levels that basically run right through the center of a value area, showing about the middle of the value area, and we can see this clearly by the blue line in the chart below. In this specific NZDUSD example that blue value line would be a good support to watch for buy signals if price rotates lower soon.

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