What are the most important concepts when it comes to forecast any financial market (Forex, stocks, futures, etc)? I think support and resistance levels, some traders might disagree with me, but the information we could get from these levels could actually help us trade with better results.
There are three things the market could do after hitting a support or resistance level:
- Change direction
Knowing what the market is likely to do after reaching one of these levels, we could adapt our strategy to trade based on that information: on what the market is likely to do. Therefore, we need to know how to draw support and resistance levels and be prepared to make the necessary changes to our strategy: move your stop loss levels, close your trade, add to your trade, etc.
But first things first, what are these support and resistance levels:
Support level: Is a level in which the market has been rejected at least twice and it is keeping the market from reaching lower levels.
Resistance level: is a level in which the market has been rejected at least twice and it is keeping the market from reaching higher levels.
Is it important to know why the market has been rejected from these levels?
No, it isn’t. I don’t care why the market was rejected from an important level, what is important for me is to determine what the market is likely to do on the following hours/days (after the rejection has happened) so I can profit from it. It’s not important to determine why the market moved up or down, what is important is: whether or not you profited from it, isn’t it?
There could be many reasons of why the market has been rejected from these levels: accumulation of buy orders (at a support level) or sell orders (at a resistance level), buyers are attracted by the lower levels (support level) or sellers attracted by the higher levels (resistance level), buyers think or feel the market will go higher (support) or sellers think or feel the market will go lower, etc. But for sure, no one knows the reason behind market rejections, but again, it doesn’t matter, what is important for us is to determine what we are going to do after the rejection. Plus, there is no way of knowing exactly why the market topped or bottomed at certain level.
As a side note, there will always be someone telling you what caused the rejection of the market at one important level, but now you know the analyst or trader is just bluffing.
3 Simple rules to draw perfect support and resistance levels
Rule No. 1: the market needs to get rejected at least twice from the level (not one, twice).
Rule No. 2: the more rejections the level has, the more important it becomes
Rule No. 3: most recent rejections are more important than less recent rejections
A chart is worth a thousand words :)
The resistance level (blue line at the top) it’s very important, the market has been rejected three times from the same level. If there was another resistance level near this one, with only two rejections, the one marked on blue would be more important.
Now, about the support levels (both have three rejections), which one is more important? I’d say support level B, because it is more recent than support level A. So If I was trading this currency pair, I’d take in consideration only support level B.
There is one rule that I always follow: only take on consideration the support and resistance levels that the market is actually taking in consideration. Why would I act based on a level that the market is responding to? Right?
One important thing to consider: support and resistance levels are more like zones instead of levels. So don’t break your head trying to figure out where to draw your level: at close of the candlestick, at the lowest low, etc. Just draw it where it touches the most rejections.
What do you think?
Feel free to comment, you don’t have to agree with me in order to leave a comment. And don’t forget to like it or tweet it if you found this article useful.
Tags: support and resistance