draw trend lines

How to identify Support and Resistance

Support and resistance are the best and most powerful instrument to succeed in trading.

In this article, you’ll learn:

INTERESTED? Read the article until the end!

Support and resistance definition

Support and resistance are the places, in the market, where the things happen.

As easy as it sounds.

They represent the levels of the price that arouse the attention of the market operator.

Follow me:
If you go to the supermarket to buy pasta and the price change by some pence from one day to another (let’s say from 0,89£ to 0,80£), you’ll probably notice the change but you’ll buy the same quantity anyway.
If the next week, the price will rise to 2£, you’ll get disappointed and start to look for another brand.

This is exactly what happens in the financial market, the smart money takes their decision around the key prices starting to sell (Supply) or to buy (demand), all the movements between these levels could be considered only as noise.

The names of these key prices are support and resistance.
Support because they avoid the prices to fall further and resistance because the prices find difficulties to rise above them.

Identify support and resistance

STATIC support and resistance indicator

Following the rules explained in “How to identify a Trading cycles” you’ll detect the Min and Max of the cycles using the formula:

Here an example for Dax30 and the weekly cycle

Support and resistance dax30(Dax30 – H1)

  1. Set a momentum indicator with, as input, half of the duration of the cycle you want to detect.
    (In this situation I’ve used a stoch with 96 periods)
  2. Highlight the moments it crosses the zero line. (Green and red arrows)
  3. Identify the minimum or the maximum price between one cross and the previous one in the opposite direction.
    (Green and red circles).
  4. Draw support and resistance starting from them.

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How to draw the TREND LINES.

Once you've identified the minimums and maximums of the market fluctuations you can use them to draw trend lines between two higher lows or lower highs.

draw trend lines(Dax30 - H1)

As you can see from the green and red arrows, they create good support and resistance.

Moving averages as DYNAMIC support and resistance

And, last but not the least, you can get dynamic support and resistance on your chart just adding the moving averages linked to your trading cycle.

moving averages as support and resistance(Dax30 - H1)

The grey average is set to 96 periods, and the black average is set to 192 periods (full cycle length).

The arrows show all the turning points on the moving averages.

A good result.

The high probability TURNING POINTS

Since every setup has its own success rate, even the strategies explained above will work the xx% of the time.

But, there's a method to easily increase the success odds on your side: Use them together!

When a support or resistance is confirmed by 2 or more identification method the bounce probabilities exponentially increase

High probability turning point(Dax30 - H1)

The highlighted points with the blue arrows show the prices with at least one support and resistance indicator. 

Efficient, isn't it?

A new high probability turning point is coming in play with two resistances and two moving averages in the area of 9725 - 9750. Keep an eye on it!

How to TRADE support and resistance

Buy the Dip Sell the Rip!

The easiest strategy is to buy high probability support with Stop Loss below the next level and Take Profit at the next resistance level. The opposite for the resistance.

Support and resistance trading strategy(Nikkei225 - H1)

But, be careful, to have a winning trading system follow these rules at all time:

  • Always sell a lower high and buy a higher low.
    This is to make sure you're trading in the direction of the trend.
  • Always open a position with an expected Risk:Reward greater than 2.
    With this little shrewdness, you'll bring the odds on your side making the trading system is profitable in the long term.

The signal & entry strategy

This is an advanced trading strategy which combines the different types of support and resistance.

  1. Identify a support using one of the methods above, for example, the static max and min. (Condition)
  2. Buy the breakout of the closest resistance created with one the other methods, e.g the averages. (Entry signal)

The opposite for the short trades.

Gold Entry Signal strategy(Xau/Usd H1)

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