Support and resistance

Support is where buying has been strong enough to stop a decline. Resistance is where selling has been strong enough to stop a rise. On a chart they show up as prices that the market reached several times and turned away from.

The reason is orders. Traders who missed a move wait for the same price. Traders with a losing position wait to exit at breakeven. Others place stops just beyond the level. All of this puts volume in the same narrow area.

Start on a higher timeframe and mark only the levels that are obvious at first glance. Then move down and add the nearest ones.

• Previous swing highs and swing lows – the most direct source. The more visible the turn, the more traders watch it.
• Edges of a range – the high and the low that price has moved between.
• Round numbers – 100, 1.2000, 50,000. Orders cluster at them.
• The previous day's, week's and month's high and low.
• Moving levels – a moving average or VWAP can act as support in an uptrend and resistance in a downtrend.
• Calculated levels – pivot points and Fibonacci retracement levels.

Price rarely turns at the same tick twice. One reaction stops a little short of the level, the next goes a little through it. Draw support and resistance as a narrow band that covers the wicks and the closes of the earlier turns. On Charts a rectangle from the drawing tools does this.

A level that is broken often changes its role. After price closes above resistance, the same area tends to act as support when price comes back to it. Broken support tends to act as resistance.

The return to a broken level is called a retest. Many traders wait for it instead of buying the breakout candle. The diagram above shows this: a breakout, a pullback to the old resistance and a move up from it.

Bounces fit a range. Breakouts fit a trend: in an uptrend resistance is more likely to break than support.

• Bounce entry – at the level, after a sign of rejection: a long wick, a hammer or a bullish engulfing candle at support, the bearish versions at resistance.
• Bounce stop and target – stop beyond the far side of the zone, target at the opposite level.
• Breakout entry – on a candle close beyond the level, or on the retest of the level from the other side.
• Breakout stop and target – stop back inside the level, target at the next level or at the height of the broken range added to the breakout point.

• Timeframe – a level on the daily or weekly chart is watched by more traders than one on the 5-minute chart.
• Reaction – a sharp move away from the level counts for more than a slow drift.
• Touches – two or three clear reactions confirm a level. Many tests in a short time often come before a break, because each test uses up the orders that defend it.
• Volume – heavy volume at the level shows that many positions were opened there.

• Too many lines – a chart with twenty levels gives no decision. Keep the few that are obvious.
• Exact prices – an order or a stop placed at the very edge of the level is often missed or hit by a few ticks.
• Calling a wick a breakout – a move through the level that closes back is a liquidity sweep, not a break.
• Ignoring the trend – support in a strong downtrend breaks more often than it holds.