Scribd
Upload
76 views15 pages

Understanding Support and Resistance in Forex

The document discusses key truths about Support and Resistance (SR) in trading, emphasizing that the more SR is tested, the weaker it becomes, and that SR should be treated as areas rather than lines. It also highlights the importance of proper stop loss placement and offers a trading strategy that profits from the behavior of breakout traders. Additionally, it covers the dynamic nature of SR and the significance of risk management in trading.

Uploaded by

mahi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
76 views15 pages

Understanding Support and Resistance in Forex

The document discusses key truths about Support and Resistance (SR) in trading, emphasizing that the more SR is tested, the weaker it becomes, and that SR should be treated as areas rather than lines. It also highlights the importance of proper stop loss placement and offers a trading strategy that profits from the behavior of breakout traders. Additionally, it covers the dynamic nature of SR and the significance of risk management in trading.

Uploaded by

mahi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Truth #1: The more times Support or Resistance (SR) is tested, the weaker it becomes

First, let’s define Support and Resistance:


Support – Area on your chart with potential buying pressure
Resistance – Area on your chart with potential selling pressure
Here are examples of forex support and resistance:

Now:
You’ve probably read trading books that say… the more times Support or Resistance is
tested, the stronger it becomes.
But the truth is…
The more times Support or Resistance is tested, the weaker it becomes.
Here’s why…
The market reverses at Support because there is buying pressure to push the price
higher. The buying pressure could be from Institutions, banks, or smart money that
trades in large orders.
Imagine this:
If the market keeps re-testing Support, these orders will eventually be filled. And when
all the orders are filled, who’s left to buy?
Here’s what I mean…

Pro Tip:
Higher lows into Resistance usually result in a breakout (ascending triangle). Lower highs
into Support usually result in a breakdown (descending triangle).
Let’s move on…
Truth #2: Support and Resistance are areas on your chart (and not lines)
This is a mistake I’m guilty of. Treating Support and Resistance (SR) as lines on my chart.
Why?
Because you’ll face these two problems:
 Price “undershoot” and you miss the trade
 Price “overshoot” and you assume SR is broken
Let me explain…
Price “undershoot” and you missed the trade
This occurs when the market comes close to your SR line, but not close enough.
Then, it reverses back into the opposite direction. And you miss the trade because you
were waiting for the market to test your exact SR level.
Here are examples of over and undershooting support and resistance in forex:
Price “overshoot” and you assume SR is broken
This happens when the market breaks your SR level and you assume it’s broken.
Thus, you trade the breakout… but only to realize it’s a false breakout.

So, how do you solve these two problems?


Simple.
Treat Support and Resistance as areas on your chart, not lines.
Why SR are areas on your chart
Because of these two groups of traders…
1. Traders with the fear of missing out (FOMO)
2. Traders who want to get the best possible price (Cheapo)
Let me explain:
Traders with the fear of missing out would enter their trades the moment the price
comes close to Support.
And if there’s enough buying pressure, the market would reverse at that location.
On the other hand, there are traders who want to get the best possible price, so they
place orders at the low of Support. And if enough traders do it, the market will reverse
near the lows of Support.
But here’s the thing:
You’ve no idea which group of traders will be in control. Whether it’s FOMO or Cheapo
traders.
Thus, Support and Resistance are areas on your chart, not lines.
If you want to know my secret technique to drawing Support and Resistance, then check
out this video:
Make sense?
Truth #3: Support and Resistance can be dynamic
What you’ve learned earlier is horizontal SR (where the areas are fixed).
But it can also change over time, otherwise known as, Dynamic Support and Resistance.
Now:
There are two ways to identify Dynamic SR.
You can use:
1. Moving average
2. Trendline
Let me explain…
How to use the moving average to identify dynamic SR
I use the 20 & 50 MA to identify my Dynamic SR.
Here’s an example of dynamic support and resistance in forex:
However, it’s not the only way. You can use 100 or 200 MA, and it works fine.
Ultimately, you must find something that suits you (and not blindly follow another
trader).
Trendline
These are diagonal lines on your chart to identify dynamic SR.
Here’s what I mean:

Pro Tip:
Treat Support and Resistance as areas on your chart (and not lines). This applies to both
horizontal and dynamic SR.
Truth #4: Support and Resistance are the worst places to put your stop loss
I need not be an Einstein to guess where you’ll put your stops.
Below Support and above Resistance, right?
An example:

And why is this the worst place to put your stops?


It gets hunted.

So… how do you avoid it?


Well, you can’t avoid it entirely.
But here are two things you can do…
 Set your stop loss a distance from SR
 Wait for the candle to close beyond SR
Let me explain…
Set your stop loss a distance from SR
You can do this by using the Average True Range (ATR) indicator.
Here’s how to do it:
1. Identify the low of Support
2. Find the ATR value
3. Take the low of support minus the ATR value
If you want to learn more, go watch this training video below:
Wait for the candle to close beyond SR
Here’s how it works…
You only exit your trade if the price closes below the low of support or the high of the
resistance.
Here’s what I mean:

And here’s something interesting… do you know the “real move” usually occurs after
traders get stopped out of their trades?
And you can take advantage of this scenario by using a trading strategy I’ll share with
you later.
But first…
Truth #5: Trading at Support or Resistance gives you favorable risk to reward
The big mistake traders make is this:
Entering trades when the price is far away from SR. This requires a large stop loss and
offers you a poor risk to reward.
An example:

But if you let price come to you, then you’ll have a tighter stop loss, and this improves
your risk to reward.
Here’s what I mean:

Remember…
Patience pays in trading. Stop chasing the markets and let price come to you.
Pro Tip:
Mark out your SR areas in advance. Then look for trading opportunities when the price
has come to your levels. If the price is elsewhere, stay out.
Now…
If you want to learn more, go watch this training video below:
How to tell when Support or Resistance will break — so you don’t get “trapped”
The takeaway is this:
 Support tends to break in a downtrend
 Resistance tends to break in an uptrend
 Support and Resistance tend to break when there’s a buildup
Here’s why…
Resistance tends to break in an uptrend
Here’s a fact:
For an uptrend to continue, it has to consistently break new highs. Thus, shorting at
resistance is a low probability trade.
Instead, going long at Support is a better trade.
Support tends to break in a downtrend
Likewise:
For a downtrend to continue, it has to consistently break new lows. Thus, going long at
support isn’t a good idea.
But, going short at Resistance is a great idea.
Next…
Support and Resistance tend to break when there’s a buildup
Consider this:
Support is an area with potential buying pressure. So, the price should move up quickly,
right?
Now… what if price didn’t move up and instead, consolidates at Support?
What does it mean?
Recall the concept from Truth #1:
The more times Support or Resistance (SR) is tested, the weaker it becomes.
So it’s a sign of weakness as the bulls couldn’t push the price higher.
Perhaps there’s no buying pressure or, there’s strong selling pressure. Either way, it
doesn’t look good for the bulls and Support is likely to break.
An example:
And the opposite for Resistance:

If you want to learn more, go watch this training video below:


Let’s move on…
A Support and Resistance trading strategy that lets you profit from losing traders
Here’s a fact:
Support and Resistance attract a lot of attention from traders. There will be some
looking to trade the reversal, and others looking to trade the breakout.
Since trading is a zero-sum game… for reversal traders to profit — breakout traders
must lose. And for breakout traders to profit —reversal traders must lose.
Do you understand?
Good.
Now… let’s learn a Support and Resistance trading strategy to profit from breakout
traders.
Here’s what you need to do:
1. Mark your areas of Support & Resistance (SR)
2. Wait for a directional move into SR
3. Wait for price rejection at SR
4. Enter on the next candle with stop loss beyond the swing high/low
5. Take profits at the swing high/low
Here’s what I mean…
1. Mark your areas of Support & Resistance

2. Wait for a directional move into SR


3. Wait for price rejection at SR

4. Enter on the next candle with stop loss beyond the swing high/low

5. Take profits at the swing high/low


Support and Resistance trading strategy examples
Losing set-up at (GBP/NZD):

Winning set-up at (SOYBNUSD):


Winning set-up at (WTICOUSD):

Now:
You must understand this trading strategy isn’t the “holy grail”. There are times you’ll
lose to breakout traders — and at times, breakout traders will lose to you.
The only way you will survive in the long run is through proper risk management. Thus, I
suggest risking not more than 1% of your account on each trade.
Frequently asked questions
#1: How do we define how wide the Support and Resistance can be?
An objective way to do it is to use the Average True Range (ATR) value as a gauge.
Here’s what I mean:
1. Find out the current ATR value
2. Add 1.5 (up to 2) times of that ATR value to your Support level
So that forms an area of Support (similarly for Resistance). You can use this method to
gauge how wide Support and Resistance can be.
A more discretionary approach is to observe how the price behaves at the Support and
Resistance area.
For instance, whether the price goes into Support briefly then get rejected or does it go
deeply into Support then get rejected. I’ll take these two levels to form an area of
Support and gauge how wide it should be.
#2: Is it important for the price to break Support and Resistance with high volume?
Based on my research, I’ve discovered that volume doesn’t play a huge part in a
breakout. So, the volume does not have a huge impact on whether a breakout is real or
not.
#3: Hey Rayner, when you mention buildup, are you also referring to an
accumulation?
Nope. A buildup is a tight consolidation where the candles are overlapping one another.
It’s pretty difficult to identify Support and Resistance nor the swing high/low.
Whereas an accumulation is a range market, where its highs and lows can be easily
identified and the market is swinging up and down within the range.
Conclusion
This is what you’ve learned today:
 The more times Support and Resistance is tested, the weaker it becomes
 Support and Resistance are areas on your chart (and not lines)
 Support and Resistance can be identified using moving average
 Don’t place your stop loss just below Support or above Resistance
 Trading at Support and Resistance gives you favorable risk to reward
 A Support and Resistance trading strategy

Common questions

Powered by AI

Traders can use the Average True Range (ATR) to objectively measure the width of support and resistance areas. By determining the current ATR value and adding 1.5 to 2 times that value to their identified SR levels, they can create a buffer zone around these areas, reflecting market volatility and offering a more robust approach to defining SR zones .

According to the document, volume is not a crucial factor in confirming breakouts beyond support and resistance. The research presented suggests that while breakout volume is often discussed, it does not significantly impact whether a breakout is genuine or not. Traders should focus on price action and buildup patterns around SR for more reliable signals .

Traders can overcome the issues by treating Support and Resistance as areas rather than lines on a chart. This approach accounts for market volatility and trader psychology, where some traders act on the fear of missing out and others aim for optimal prices. Recognizing SR as zones prevents missing trades due to price undershoots and avoids false breakouts that may occur due to overshoots .

Traders can employ a strategy that profits from the typical actions of losing market participants by marking key support and resistance areas, waiting for a directional price move into these zones, observing price rejection at SR, and then entering trades on the subsequent candle. Stop losses are placed beyond the swing high/low, and profits are taken at the opposite swing. This approach capitalizes on false breakouts where reversal traders profit when breakout traders are wrong, and vice versa .

Trading at support or resistance levels favorably impacts the risk-to-reward ratio because it allows traders to enter trades with tighter stop losses near these levels, minimizing potential losses while maximizing the potential reward. By waiting for the price to come close to SR, traders can set a smaller stop loss and improve their chances of a high return compared to the risk taken, unlike entering trades far from SR which necessitates larger stops and worsens the risk-to-reward ratio .

Placing a stop loss close to support or resistance is disadvantageous because these areas are frequently targeted by stop hunts. As many traders place their stop losses at these obvious levels, the market may temporarily move beyond these points to trigger the stop losses before reversing. This volatility can lead traders to be prematurely stopped out of potentially profitable trades .

Dynamic support and resistance are levels that change over time rather than being fixed. They can be identified using moving averages and trendlines. By applying moving averages like the 20 or 50-day MA, or trendlines drawn on a chart, traders can spot dynamic SR which adapt to the movement of the price, offering a more flexible view of market trends .

Support and resistance tend to break when there is a buildup, i.e., a period of tight consolidation where the price repeatedly tests these areas without significant withdrawal by bulls or bears. In a trend, resistance is more likely to break in an uptrend and support in a downtrend since sustained moves in the respective directions exert consistent pressure that eventually overcomes SR .

Repeated testing of support or resistance leads to their weakness because each test consumes the buying or selling pressure present at those levels. For instance, every time support is tested, buy orders are filled, decreasing the potential buying power at that level. Once these orders are exhausted, there's no longer sufficient demand to prevent the price from breaking through the support level, leading to its eventual breakdown .

Traders face the challenge of differentiating between accumulation and buildup in SR contexts due to their similar consolidation appearance. Accumulation is characterized by a range market with identifiable highs and lows, indicating market equilibrium within that range. Buildup, on the other hand, depicts tight consolidations with overlapping candles, typically difficult to define SR levels. While accumulation suggests balanced buying and selling, a buildup often signals potential weakness or strength at SR, as persistent pressure could lead to a breakout in the trend direction .

You might also like