Support and resistance levels and how to draw them

Support and resistance levels' forming principles based on supply and demand

Before we get into the details, we must understand the support and resistance areas thoroughly. Support and resistance are fundamental concepts in the technical analysis used to identify price levels where the market has historically reacted to that area.

In a downtrend, the prices decrease as the prices go down, the price becomes more attractive for buyers who have sold in higher quantities, and gradually more buyers enter the market until the supply and demand reaches relative equality in an area. If the buyers' power is greater than the sellers, it will cause the price to return, which is called a support zone.

On the other hand, the shares' value starts to rise in a market due to high demand, sellers gradually enter the market as the shares increase, and the opposite of what we explained about the support areas happens. In this case, the sellers' power is more than the buyers. And with the downward return of the price, a resistance zone is formed.

Support and resistance area types

Support and resistance areas are divided into the following two categories based on whether they are a fixed price range or variable areas:

• Static support and resistance areas
• Dynamic support and resistance areas

Based on the trading time frame and whether the market is in a trading range or trend, the use of each is different, which we will explain in detail.

Static support and resistance areas

This type of support and resistance are more valid and defined as horizontal areas on the chart. We will explain in detail further.

Dynamic support and resistance areas

This type of support and resistance is less valid than the static type, and its drawing way can differ from another trader based on each trader's experience and personal strategy. Generally, a resistance line can be formed by connecting the ceilings in a downtrend, and a dynamic support line can be drawn by connecting the floors in an uptrend. (Note that you can draw a dynamic resistance line by connecting the ceilings in an uptrend or a support line by connecting the floors in a downtrend. But it is better to use this method of drawing the resistance and support line to exit the trade).

In what time frame is it better to draw support and resistance areas?

It is better to put your chart in candlestick mode at the beginning because they provide a lot of information in one view. The time frame you choose depends on your trading strategy. Day traders may use 4-hour and 1-hour time frames, while long-term traders may use daily or weekly charts.

Note that support and resistance levels are more valid if seen on higher timeframes. To better identify the support and resistance areas, refer to the market's history, look for the areas that returned the price or the price was stuck in those areas, and returned with a lot of strength and sharply in the current trend's direction from that area.

How do you identify support and resistance areas?

• Using moving averages to find support and resistance areas
• Drawing support and resistance areas using supply and demand

Using moving averages to find support and resistance areas

Using Moving averages can help identify support and resistance areas. If the price is higher than the MA, it plays the role of support, and if the price is lower, the MA plays the resistance role.

Read More: Moving average indicator

Drawing support and resistance areas using supply and demand

After identifying potential support and resistance levels, the next step is to draw these areas on the chart. You can use horizontal lines, which is the easiest way to draw these areas, or you can draw a rectangle to show a range, which using this method is better. That shows that support and resistance are not exact price levels but a price range in which the price can fluctuate. Depending on the trading technique, go to the higher time frame and identify where the price is stuck, to the area where the sharp has broken out.

In the resistance areas, the appropriate range to draw, from the highest price that the market has seen in its recent uptrend to the floor of the last bullish candle, can be a suitable resistance area for the price to react if it returns to this area. In the support areas, the appropriate range for drawing, from the lowest price the market has seen in its recent downtrend to the ceiling of the last bearish candle, can be a suitable support area for the price to react if it returns to this area.

Changing the support and resistance areas' character

If the price crosses a support or resistance zone, it may indicate a change in that area. For example, if the price can stabilize in a range lower than a support zone, that support can play the resistance role if the price returns upwards, or if the price can stabilize in a range higher than a resistance zone, that resistance can play the support role if the price returns downwards.

How to carry out buy and sell trades using support and resistance levels

When the technical and fundamental analysis has a bullish view of the market in the time frame higher than your trading time, then when the price reaches the support area, you can refer to the lower time frame, simultaneously when the price approaches the desired area, signs of the downtrend's strength decreasing appear, the price reacts to this area, and when you see the appropriate confirmation for the formation of the uptrend, you can enter a buy trade.

In case your technical and fundamental analysis has a bearish view of the market, then when the price reaches the resistance area, you can refer to the lower time frame. When the price approaches the desired area, the signs of price reaction to this resistance area appear, and you see the appropriate confirmation for a downtrend formation then you can enter into a sell trade.

Summary

Remember that like all trading strategies, using support and resistance levels alone is not helpful, and you should use them in conjunction with other trading methods. However, understanding these levels can provide useful information and improve your trading performance.

Although using these areas as a multi-timeframe with other trading strategies will increase the efficiency of your trades to an extent, you should note that there is a possibility of mistakes in this type of trading, so to preserve capital and earn continuous profits, it is better to use stop-loss for each trade along with capital management strategies.