Support and resistance may look simple, but when it comes to making actual trading decisions, most traders acknowledge that it’s not as easy as just drawing some lines on your charts. With the 7 tips in our article, you can take your support and resistance trading to the next level and avoid the common mistakes that most traders make.
Body vs. wicks?
Most traders use wicks and the candle extremes when drawing support and resistance levels. However, candle bodies represent closing times and especially on the daily, weekly or monthly charts, drawing support and resistance on the candle bodies can help you understand price moves in a new way.
During your top-down market analysis, start on the higher time frame and work your way down to the lower time frames. On the higher time frame, you start drawing your levels using the bodies and the major swing points. As you move lower, you fine-tune and adjust your levels and then end up with a very accurate way of explaining past price action with optimized levels.
In the end, there is no right or wrong, you only have to make sure that you are following a consistent approach.
Historical vs. recent levels?
Is past price action more or less important than recent price behavior? This is a question most traders have and it’s important to understand the implications here correctly. You’ll often be able to see strong support and resistance areas that have worked perfectly in the past but then price completely stopped respecting the level just like it has never existed in the first place.
For that reason, it’s important to always keep updating your support and resistance levels. We recommend going over all your levels at least once per week (more often if you are a day trader) and check whether the markets are still paying attention to the levels on your charts. Support and resistance levels only show potential price areas of interest, but if markets don’t respect them anymore, you need to update and adjust them in order to make correct trading decisions. Also, you should take off old support and resistance levels if price is not paying attention to it anymore so that they don’t distract you during your analysis.
One vs. multiple touches?
Conventional trading wisdom will tell you that the more touches you have on a price level, the stronger it is. However, conventional wisdom is seldom right and especially when it comes to making general assumptions, listening to such suggestions can lead to bad trading results.
All you need for a support and resistance level is one previous swing high or low. Meaningful swing highs and lows often turn into support and resistance levels in the future. However, the third time price comes back to a level, it usually does not hold as well anymore because at that point, it becomes very obvious and the majority of traders will have the level on their charts.
A good rule of thumb is that the more obvious something appears on your charts, the harder it usually is to profit from it.
Single support lines?
This is something very overlooked in conventional technical analysis. Support and resistance rarely comes in the form of single lines and this is also often the result for inconsistent trading results and problems of most traders who follow support and resistance principles.
More often than not, you’ll find support and resistance areas around price levels that offer much more explanatory power than single lines. Whereas traders who trade off of single lines can be taken out by volatility spikes easily, or miss moves when price does not reach their level, traders who follow price areas can avoid many of those common problems.
A tip from us: you can usually draw multiple lines around a support and resistance area to capture the most price action. Then, you avoid any price moves that happen inside the area as those signals are usually less reliant.
Pending vs manual
It’s common practice to place pending orders ahead of support and resistance levels and then just wait for price to get there and hope to see a bounce or a break. Again, support and resistance levels just show potential and it’s usually impossible to make predictions about whether a level will hold or break.
The advanced trader will wait for price to reach his pre-marked levels and then analyzes price action. The way price moves into the level, how it behaves there and the general market context are important clues that need to be taken into consideration when trading support and resistance. Making predictions with pre-placed pending orders does not show a professional trading approach.
Stops around support and resistance
Another problem many traders have is due to incorrect stop loss placement around support and resistance levels. Traders believe that the more obvious the level, the better it is – that’s what trading books teach you right?! However, when the majority of traders look at the same level with the same trade idea, it becomes very easy for the advanced traders to use this knowledge to their advantage. This flawed amateur behavior is often the reason why you see volatility spikes and fake breakouts around major support and resistance levels; the professionals move price in a way so that they trick amateurs into taking unprofitable trades.
Instead, wait for the dust to settle and only trade when price has shaken out amateur and has established a clear sense of direction.
There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.