How to Draw Support and Resistance Lines

The Forex market offers traders the opportunity to make large profits if the support line and resistance level are well examined and evaluated. In this market, traders benefit from price fluctuations and buy or sell according to their type of analysis. Falling market means that the sale scalepan is heavier than the buy scalepan. Conversely, in a rising market, the buying scalepan is heavier. This is where support and resistance levels are formed. In other words, support and resistance levels can help traders gain an insight into the strength of the price trend.

What are the support and resistance levels?

“Support” and “resistance” are two terms related to the price chart levels that limit the movement range of the market. The support level is usually where the price downtrend stops, and the price then goes up through an uptrend. On the other side, the resistance level is where prices normally rise, but they are stopped by this level and move downward.

These levels are called supply and demand. If there are more buyers than sellers, the price can go up, and if there are more sellers than buyers, the price goes down. The closer prices get to these levels, the more reliable it is to predict future price movements. These two levels usually become psychological levels for traders because reaching prices to these levels increases buying or selling motivation among traders. If the price touches or breaks the support or resistance levels but returns to the previous trend after a short time, the price just tested the level based on technical terms.

Related Article: What is Technical Analysis?

But after breaking the level, if the price stays beyond that level for a longer period, the trend will continue until a new level of support or resistance is established.

⚠️ Remember that while support and resistance levels indicate a price range, support and resistance lines express this in more detail.

Identifying support and resistance levels

To understand the support and resistance levels better, we must first identify the support and resistance levels. There are some ways to identify support and resistance levels to help you choose the best time and place to enter the market. To determine the support and resistance levels, traders can consider the following items:

1. The data relating to past prices
   The most reliable source for identifying the support and resistance levels is the past prices, which are very valuable to traders. The main point is that you can get acquainted with past patterns by using these prices (sometimes formed due to recent activities). So, you can recognize them in case of their reappearance. However, it should be reminded that past patterns may have formed under different circumstances, and they are not a reliable indicator by themselves.
   
2. Previous support and resistance levels
   You can use the previous outstanding support or resistance levels as signs for possible entry and exit points and also as indicators of future price movement. It is important to note that support and resistance levels usually don’t have accurate figures. It is unlikely for a market to return to its past value after a period of time. Therefore, it is much more practical to consider them as areas of support or resistance.
   
3. Technical indicators
   Technical indicators or trend lines can generate dynamic support or resistance levels that move with the chart progresses. The support and resistance levels are often based on different factors in different markets. Detecting the levels that affect the market prices can be time-consuming. That’s why learning to identify the support or resistance levels using past price charts is important.

Support and resistance lines

• Support line:
  The focus of buyers is on this line. When the price reaches this line, it has dropped so much that it gives traders an excellent opportunity to buy. In fact, after the candle reaches this point, the market begins to support itself and prevents further falls.
• Resistance line:
  Usually, sellers take advantage of the market when it reaches this point. When a candle reaches this point, it means that the market has risen to the highest price level. Now it is the sellers’ turn to resist the excessive price increase by selling this share.

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How to draw support and resistance lines

To draw support and resistance lines on charts, first, you must find them using one of the following methods:

• The support and resistance levels in the previous time frame
• Moving average
• Trend lines
• To draw the support and resistance lines, you can combine these methods.

In the following, to draw the support and resistance lines, we explain different methods in details.

Ceiling and floor prices

to draw the lines using ceiling and floor prices:

1. First, select your time frame.
2. Identify the highest price level on the chart.
3. Identify the lowest price level on the chart.
4. Mark each ceiling price and floor price.

If there is a downtrend, you can draw the support line by linking the lowest point to a higher point. Conversely, you can draw the resistance line by linking the highest point to the lowest point if there is an uptrend.

Using the previous time frames

If you are using the support and resistance levels of a previous time period, choose a short time period, for example, 15 minutes. Then, draw the previous levels from the one-hour and four-hour time frames on the 15-minute frame. If the longer time frames levels are the same or equal to the shorter time frame levels, the support and resistance levels can be considered correct and solid.

Moving average indicator

Using The Moving Average Index is another method to identify and draw support and resistance levels. To do this, you can activate the indicator and draw a diagonal line from the highest point to the lowest point to see which direction the trend is moving. If the trend line moves upwards, this moving average acts as a support level and vice versa. Since the level is constantly changing, this line is called dynamic support or dynamic resistance.

Trend line

For a trend line to be usable, there must be at least three levels before drawing lines. Once you have drawn the trend line on your chart, your uptrend line will be the support level. On the other hand, the downtrend line will be the resistance level. Similar to the moving average support and resistance level, this level is also dynamic.

Conclusion

Various methods in the Forex market can be used to predict the future price and reduce losses. The advantage of resistance and support levels is that different patterns and indicators can be used to draw them. When using this method, it should be noted that combining two or more of the above methods is necessary to obtain strong and reliable support and resistance levels.

Frequently Asked Questions

Source: Wikipedia