Drawing Support and Resistance Lines properly
Everyone who uses support and resistance to trade with will give you a different explanation about the right or wrong way to draw your support and resistance lines. It is my humble opinion that no one way is either right or wrong. They just have to be right enough for “YOU”, to have the confidence to trade off them.
I am in agreement with my first forex trader mentor that the price reacts to support and resistance levels created in the prior swing. Because of the fractal nature of a swing you need to drop down a timeframe to analyse the internal trend within that swing, this then allows you to draw your support and resistance lines onto your charts.
The chart below shows a swing up on the h4 chart, the two verticle dotted white lines show the start and end of the swing.
We can now drop down to the h1 chart to see the trend within that swing.
I can then add my horizontal green support lines wherever the price makes a higher low that goes on to make a higher high, (a confirmed support level)
You will notice that as the price hits these prior levels of support it will bounce up off and either resume the uptrend or crash through if the sellers overpowered the buyers. If it does crash through then we wait for the price to retrace back to the old support before seeing the sellers take control and drive the price down. The phenomina is SBR, Support becomes resistance. Some call it a PPZ price pivot zone. It happens the same way on every timeframe.
This particulay example is beautiful because we can see clear gaps between the green support lines, these represent clear levels to trade and make very nice pips.
When you are considering entering a trade you must look at everything the prior swing that you are trading against to ensure you find anything that may cause your trade to fail. Have a look at the additional red lines and comment I have added to the h1 chart.
We are now seeing many reasons not to take this short trade. It is not a clear short trade. It’s a no brainer if you look back at the h4 chart I posted earlier, we can see this is most likely just a retracement to 1.29201 before continuing on up in the h4 and daily uptrend. This could present a very nice opportunity to go long, a hammer candle off that red support line on the daily chart would be an absolute gift.
I have mapped out what I think may happen, I will be watching the move on the , 1 min, 5 min and 30 minute timeframes for scalping opportunities until the daily charts show their hand.
Finally to add another powerful weapon that I mentioned in my last post we could add fibonacci levels and see what they tell us. I won’t get started on elliott wave theory but we look like we are also entering the abc pullback stage to. Fibs are on the chart below.
It is amazing how all the different methods of trading technical analysis come together and help us trade like we do. However price action on the daily weekly and monthly charts override everything in my experience so ALWAYS check your daily charts for absolute safety before entering a trade. In this case the daily candle from Friday shows us a bearish outside bar, BEOB, a clear signal of selling and probably just profit taking.
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Always Remember.
Keep your risk as a percentage of your capital low (1%), equals stress free trading.
Always work out potential losses before potential profits.
We are paid to take risks, if you aren’t in a trade you cannot win a trade!!
Buy off support and sell off resistance.
Bank partial profits early and move your stop loss to break even as soon as you can.
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