Knowing what support and resistance is in terms of trading is all good and well, but as a trader, you need to know how to identify these levels in the blink of an eye. Doing so may be easier than you think. Let’s show you how it’s done.
To find support and resistance levels, you will need to pick out price points where price has halted and reversed. Elements that can help you do this are by spotting large areas of consolidation, large price movements that have halted and reversed, and all-time highs and lows of price.
This article will cover support and resistance and how you will learn to spot and plot them on your charts. We will cover elements that will help you identify, distinguish and correlate these levels to one another and on various time frames. Don’t skip part 2 of this tutorial. Read on.
How to find support and resistance levels
The next stage of understanding support and resistance levels in trading is to understand how to find these levels.
Make sure if you have not covered part one of this tutorial course on support and resistance that you do so. These tutorials are designed to follow one another and allow you to take in (absorb) the material in chunks that make it easy to understand.
Now you should understand that support and resistance levels are these invisible boundaries that price may potentially pause at and, in many cases, may even reverse.
Finding or spotting these levels does not require you to do anything specific other than to look at the chart you are on and, with your eye, and pick out these levels.
This may seem a bit daunting, and one of the questions I always get asked is “how do I know that I’ve spotted or chosen the correct levels” or “how do I know if these levels are correct?”.
A basic understanding of what support and resistance combined with common logic is what you will use to find these levels. Sometimes they are easy to spot, and sometimes they may be a tad more difficult.
With time and practice, spotting these levels will become second nature, and you won’t even have to use a horizontal line to understand or see where they are.
It is imperative that you understand that there is no magical or mathematical formula that you use to find, spot, or construct these levels. Your eye will be key here, and it will be all that is needed to find these levels.
Let’s look at this example below. Take into consideration that we are viewing some of these examples on the daily time frame and understanding what major and minor support levels are later will have time frames play a role to a degree.
In the example of the AUD/CHF below, I have marked out 5 support and resistance levels indicated by the 5 horizontal dotted white lines.
Now how did I come to a conclusion to draw these levels here? Well, there are a few factors to consider.
Firstly I will consider valleys and peaks in a consolidation range (price that is not trending), and in these ranges, there has to be enough of a movement that warrants multiple valleys and peaks being created. One or two will not suffice.
Not only that, but you will have to look at the same price point along the chart to see if there are other valleys or peaks that are created at the same price point. Take, for instance, the second and third lines from the bottom of the chart. The consolidation happens in December 2021 and March 2022.
Multiple valleys and peaks are being formed here, and looking back in time at the chart; I can see that in Late August of 2021, there was a strong reversal from this price point. Then there was some more consolidation with peaks and valleys throughout August and December of 2020. Price keeps hitting these levels of support and resistance and effectively rebounding in most cases. Even at present, we can see that this support level played a role in stopping the price in July of 2022.
After looking at consolidation along with the peaks and valleys that make it up, I will consider large price movements with a strong reversal.
Consider the first line at the bottom of the chart and then the fourth from the bottom. In both cases, price trends or makes a large movement and then reverses. Moreover, these price points have multiple reversals at this price point (at least two).
This is clearly visible with the first line at the bottom. The fourth line shows a strong reversal in late October/early November of 2021, and then it also shows price struggling to break resistance in December 2020 and January 2021. The opposite, where it consolidates and struggles to break through support, is also clearly visible in April of 2022.
One of the last factors to consider is all-time highs and all-time lows. The fifth line from the top shows this. You may wonder why I never chose to draw this resistance level right at the top when the price hit an all-time high in February 2021.
The reason for this is that I consider the amount of consolidation occurring in May of 2022 to be more of a stopping point for price; as you can see, it struggled here. Moreover, I chose to line up my resistance level here to include more touches for this line.
If you look back at the price in February, April, and May of 2021, you can see that this line also creates a support level at this price point.
It is important to consider that support and resistance levels are sometimes not exact price points but rather (as I have stated multiple times) levels. This means there is a range (area) at which these levels occur.
Thus these are the key takeaways;
- Consider consolidation and if there are multiple valleys and peaks along with previous reversals at these price points to draw support and resistance levels
- Find trends or large movements that formed a reversal and look for other areas on the chart where price also paused at this point for additional support and resistance levels.
- Consider all-time highs and lows. These are usually definite signs of support and resistance levels.
- In general, try to find where peaks and valleys pause and reverse and where you can clearly see signs of these levels in action.
Major and minor supports and resistance levels
Now that we have covered how to find (spot) these levels, we will need to dissect support and resistance levels into major and minor variations.
There are two main aspects to think about when understanding major and minor support levels, and those are;
- Time frames
- Large or small pauses and reversals
To a degree, technical analysis is subjective, and retail traders with years of experience may even consider it an art form. Experience, understanding, nuances, knowing the asset, and more will play a hefty role in your analysis, and understanding that technical analysis indicators can be used across a spectrum (not just cut and dry) will eventually help you to be profitable.
Understanding support and resistance on higher time frames
In order to understand the first element regarding major support and resistance levels, we will have to account for time frames.
For the purpose of this article, I will assume that you have an understanding of time frames. Going over time frames in detail is beyond the scope of this article, but I will cover it in another article which you will be able to find here eventually.
However, if you do not understand time frames, I will break it down for the purpose of this section.
Support and resistance levels will work “better” on higher time frames to a degree. This is because the amount of liquidity (volume) and price action (price movement) that plays out daily accounts for all the trading during that day. Thus the price action that you see on a daily chart is very concrete.
To try and understand this, consider that in order for charts to represent a candle on any one time frame (especially higher ones), candles from lower time frames have to be combined.
So, in simple terms, an amount of trading that is almost incomprehensible during a day makes up daily price action candles, and thus, when levels of support or resistance are formed here, you can understand that the amount of buying or selling that halted price at these levels of support or resistance is very strong and, hence, price, if it reaches these levels again, will most likely pause here.
With this understanding, we can say that the strongest support and resistance levels can be found on the daily and weekly time frames, with the weakest levels found when scalping (on the one-minute time frame).
Consider the example below of the USD/CAD. I have marked out a level of support and resistance, and as you can see, the price halted here many times on the daily time frame even though no big price movements were leading up to these reversals except for the one occurring in June of 2018.
We can establish this level as a major support and resistance level because if we move down to the 4-hour chart, we can see that the price tried to move past this point multiple times and failed.
As I stated, the sheer amount of volume needed to push the price past these levels needs to be enormous, and you can witness this in March of 2020 when the volume in trading spiked and moved the price past this resistance level.
Understanding support and resistance in terms of movement
As I stated, technical analysis is to a degree subjective, and one could also consider that large price movements that pause and reverse can also make up major levels of support or resistance.
For example, some retail traders will only trade on specific time frames and will not utilize higher ones to aid in their analysis. As such, we need to consider that higher time frames may not be the only option in finding major support or resistance levels.
Consider the example below. I have drawn a support and resistance level marked on the 1 hour time frame of the AUD/JPY.
As you can see, this is a clear level of support and resistance with the price respecting this level between the 15th and 19th of July while bobbing above and below it. Then on July 25th, you can see a massive reversal from a downward movement that takes place at this level.
If a retail trader is trading on this one-hour chart, they would consider this an important support and resistance level.
However, if we shift to the daily time frame of the same chart (picture below), we can see that this level is nothing out of the ordinary or, for the most part, would even warrant us wanting to place it on the daily chart.
Major support and resistance levels
We now have two elements in distinguishing major support and resistance levels. Firstly, major support and resistance levels are found on higher time frames because they are truly respected once these levels are established on these higher time frames.
This is because the amount of liquidity that has been built up at these levels from trading is enormous, and the amount of trading that it will take to move the price past this point is gigantic. Thus the levels on higher time frames can be considered to be major support and resistance levels because they are heavily respected.
Then on lower time frames where higher time frames are not considered (because if they are, they will most likely have no bearing), but price movement is large enough to warrant these levels being drawn is another factor to consider when establishing major support and resistance levels.
Minor support and resistance levels
Now that we have established how to determine major support and resistance levels, we need to discuss minor support and resistance levels. Depending on you as a trader, your strategy, and your analysis, you may include or not include this type of indicator in your trading.
Minor support levels are somewhat opposite to major support levels, but they overlap to a degree. Major support levels on a higher time frame, if drilled down to lower time frames, could seem to be insignificant because even though there might be a lot of consolidation at this point, there might not be a lot of movement, and if a higher time frame is not considered, then they may be overlooked.
Consider the example below of the EUR/NZD. I have marked out a support and resistance level on the daily time frame, and I would consider this to be a level of support and resistance. This is due to numerous consolidation points that do not break past this price point, as well as large enough reversals that occur here as well.
However, if we move down to the one-hour chart, the level seems to indicate that this level is not so significant. I would consider this support and resistance level minor in this time frame because we could easily establish other more prominent levels.
Hence minor support levels tend to be more subjective and correlate to higher and lower time frames. Personally, I consider minor support and resistance levels to be areas where price has halted many times, but the movement of price is not large. This means there is typically lots of consolidation with the peaks and valleys hitting the level multiple times.
With this logic and reasoning, I implement minor support levels on all time frames but will correlate it to higher or lower time frames to get a clearer understanding of the level.
Support and resistance Part 2 summary
Part 2 of this support and resistance course (tutorial) identified how to find support and resistance levels. We also considered major and minor levels, correlated them to each other, and implemented various elements to identify and distinguish them.
As technical analysis gets more involved, the amount of comprehension involved may seem overwhelming but trust me when I say that your eye and logic is your best friend. With time and experience, picking out these levels will become second nature.
If you are interested in the video instructional course “How to Find Support and Resistance,” watch how one of our other retail traders breaks it down in video format below. Remember, if you like the content, then do us a favor and support us by subscribing to our YouTube channel.
