Finding Support and Resistance
This is how I go about finding support and resistance.
Step 1:
Open your platform and begin with a H4 chart and find areas that have been used as BOTH support and resistance. Remember that lines change polarity and at one point a line may serve as resistance and later as support. Often there is a range of S/R that could be a couple pips to 40 or so. Be as accurate as possible. Mark the top and bottom of this S/R range because in later steps you will look at lower time frames to help pin point in that range the line the banks will be watching. The reason we start with H4 has to do with economics. Value is determined over time. If you were to sell me your car and I was not allowed to look at any information other than information about that car on the day you were selling it to me I would have a hard time determining what the value of the car should be, and you would have a hard time giving me an accurate price. But, over time we can determine the value of the car based on past history of when it was made, what was it sold for before, past demand and supply of this car, etc. etc. The 4 hour time frame severs best in giving us a combination of the most current and reliable lines. A day chart is a tad too long and makes it a bit difficult to accurately determine levels, and an hourly a bit too short to be as reliable as we would like.
Step 2:
Taking the support and resistance range found on the H4 chart move to a lower frame (M15 to M5) and search this area for a more accurate assessment of support and resistance. The M5 or M15 frame serves as a microscope for each H4 session and will show you with detail what happened over each four hour period allowing you to see even more clearly where the price was finding the most S/R. Evaluate the last few times price used this level and buyers and sellers were in the market. Look for the place where the price has bounced the most (M5 will give you more detail). This point will hold the most significance in the S/R range you found on H4. There will be more than one choice on H4 (that is why we create a range) so by looking at lower frames you can more accurately determine value and find the price that is best. The more accurately you can determine value the more you can reduce the draw down on your trades. It will help you tighten your stop losses and risk less to gain more.
Step 3:
Now that you have your strongest areas of support mapped out you can begin to look for areas of support and resistance starting with a H1 or M30 chart that exist between your most significant S/R lines. There are many opportunities for trades between your H4 S/R lines and your D1 lines (step 4). Remember though, trades taken on S/R in smaller time frames means that your targets need to be smaller. If you are taking a trade off M5 S/R then you should not be targeting a 100 pip gain. This process of placing lines shows you how time frames should work together and how to properly use lower frames. And you should also be encouraged to know that you don’t have wait for trades to come to those H4 lines. You can trade lower level time frames off S/R, but PLEASE, PLEASE, note that the lower you go the riskier the trade becomes because S/R on lower frames (the S/R we find between your strongest support lines found on H4) becomes increasingly less reliable. The logic behind this is that in the lower frames the opinion of the field of traders begins to broaden. So if you have 20 groups of traders and they all have a different opinion you can see how crazy that could become. That is why I often call these areas “no trade zones” because the risk is so high. With H4 lines (higher frame lines) the opinion of the field of traders is far more unified. Your 20 groups of traders have the same opinion and will most likely react the same way, thus giving you easy gains and potentially substantial gains of 100 or more pips. The more unified the field, the higher the probability of success, and those trades are the ones that pay the most.
Step 4:
Go to your D1 chart and evaluate S/R levels there off what you found on your H4 chart. The D1, M1, and W1 charts will also give you lines for future trades with huge payouts, but start with H4 first and then compare with D1 and higher.
NOTE:
Do not use M5 – M30 to originate support and resistance levels. Use M5-M30 for precision, to determine the exact point of support or resistance AFTER your S/R ranges have been established on H4. Do realize though that once we find that line we don’t just throw out the range. Those small S/R ranges are there for a reason because people are exiting and entering the market at different times. Just make note of this so you don’t panic if you take a trade off a line and you have some draw down.
The easier that support and resistance is to spot increases the chances of that line being an area for the price to react so that we see previous buyers sell and people waiting to sell enter or where previous sellers buy and people waiting to buy enter. The easy to spot lines are the ones that most often pay the most and have a higher probability of success based on the fact that the majority of banks will stake larger positions in those areas.
If a line has become an area where the price has floundered back and forth then that area’s significance diminishes. The more the banks do not pay attention to a line the more we do not give it credence. We are insignificant so we follow their lead.
About trading against the trend: Your choice to trade against the trend should be determined be a ratio. The higher the time frame the safer it is the trade against the trend. The lower the time frame the more risky it becomes to trade against the trend. I would suggest that if you are taking trades off S/R on M5 or M15 that you never trade against the trend. Some people say never trade against the trend. I think this is ridiculous to say never, but just know that it does increase risk so you better have some experience under your belt. We can never be 100% positive. All we can do is reduce risk and increase probability.
