How to establish Support and Resistance?

Plotting Support and Resistance Lines
Sometimes the candlestick body goes past the support or resistance line, but does not follow through with the momentum. It jumps back the opposite way. These are called "false breakouts". So avoid falling into this trap. To filter out these false breakouts, you should think of support and resistance more of as "zones" rather than concrete numbers.



It's because orders tend to get clustered around these areas of supply and demand. There are traders who place stops there, and there are traders who place orders to trade in the direction of the break. And because support and resistance levels are where orders are clustered, prices tend to move towards them.

Identifying Zones
One way to help you find these zones is to plot support and resistance on a line chart rather than a candlestick chart. The reason is that line charts only show you the closing price while candlesticks add the extreme highs and lows to the picture. Then plot support and resistance lines through the clearly highlighted zones where you can see the price forming several peaks or valleys.



Testing Support and Resistance Levels

Sometimes the support and resistance levels appear to be broken, but in fact it is the market "testing" the levels. In such "tests" you will find candle stick shadows extending past the levels. Every time a support or resistance is tested it becomes stronger.



Break-off Strength at Support and Resistance Levels
Let us look at an EUR-USD example where the market test the 1.2977 resistance level twice going on to test the support level of 1.2478 thrice, before coming back to the resistance level at 1.2977 for some huge gains.

It shows that a strong resistance (or support) when broken will be followed by sharp movements in that direction.



However, in practice traders rarely use single support or resistance to make trading decisions. They search for support or resistance levels which are delineated by several support or resistance points. The more a support/resistance level is tested, the more accurate it is. Support and resistance levels are more likely to look like in the picture below. With some practice you will also learn to master this handy tool.

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