# The Best Support and Resistance Levels Part 1

Today I am going to give a lesson on how to find some of the best support and resistance levels in the market.  If I had to say - I think there are three types which are the best support and resistance levels you could find.  But it would take a long time to go into each type, what are the characteristics of each, what they mean from an order flow perspective, and how to trade each type.

So I am going to cover in today's lesson, what are some of the most critical variables to look for when evaluating support and resistance levels.  If you can learn to spot these levels, read the price action and key variables for each level, you will greatly enhance your trading, by finding better entries, knowing how the market is likely to react off a level, and how to increase the probability of your trades.

By first learning to read these key variables which I will list below, they will provide you with a lot of information in terms of;

-how the order flow is relating to them
-how these levels will improve the probability your trade or rule based price action system
-how you can trade these key levels

Note: I want to hear your feedback on this lesson, like what key points stood out for you, what you found useful, how you can apply this to your trading & what you thought of the key points.

I will start this lesson by talking about what are some key things to look for when evaluating support and resistance levels.  I will then describe with some details how each variable informs you of the order flow behind the price action.  Then I will go over some basic methods of how you can trade them.  I will also give examples to demonstrate how these elements work, then end with a brief overview of what we covered.

Key Things To Evaluate Support and Resistance Levels
If I had to list what are the key things I use to evaluate support and resistance levels, it would be the following;

1) How price reacted to this level in the past (held, became a breakout - pullback level, bounced violently or timidly off of it)
2) How significant is it (lower time frame, higher time frame, held for how long?)
3) How is price reacting or responding to it now
4) What is the speed or impulsiveness price is approaching it now

All of these things communicate information to me about the uniqueness of this level, how the buyers/sellers reacted towards this level in the past, how likely they will respond to it in the future, and what they are most likely to do at this level.

Zones & Areas
It should be noted that I do not consider support and resistance levels to be lines in the sand, but more of a 'zone' or 'area'.  That means I do not consider a resistance level to be one price, but likely several pips on either side.  This could be due to differences in price feed, server time, what other traders think of that level, and how they would play it.

A scalper will more likely get as tight to the level as possible, but scalping orders rarely are large in volume or market movers.  However, a swing trader or large institution will likely be getting in at several levels, and the level you might be spotting may be one of them they are placing a large order at.

Because of this and all the different ways institutional players relate to these levels, support and resistance levels for me are zones or areas which could be anywhere from a few pips wide to 10+, maybe more depending upon the time frame the level relates to.

Obviously a level from a weekly time frame over years would have a little more play then an intraday level on the 1hr chart so take this into consideration.

What Each Variable Communicates
Although I could spend an entire treatise writing about all the things each variable above communicates, I will go over the key points here.

1) How Price Reacted To This Level In The Past - this is a big one as it tells me what the major players thought of this level.  Was the pair highly over/under valued here and it produced a violent reaction in the past?  If so, then the first time it comes back to this level, we can expect a strong reaction.  Why?

If the reaction off a level was fast, that translates into heavy buying/selling with some large player initiating the rejection.  This is followed by other players quickly rushing in to get as close to that price as possible, essentially chasing for the best price, but agreeing with the initial rejection.  These levels are defended with a lot of money, and if price does not come back for some time because it traveled fast and furious off this level, then the next time it gets there (especially if it's the first time back), expect a strong reaction.

Exhibit A - Gold Daily Chart

When gold sold off massively due to huge margin increases by the metals exchanges, it crumbled hard and everyone was wondering where the bottom was.  It found it eventually at \$1532 where in one day, it opened at \$1640, jumped up \$23, dropped \$130, then bounced \$96 from the lows which was quite an amazing rejection inside one day.  This is a violent reaction, so traders were definitely taking notice of it the next time it approached this level.  Can you guess what happened when it got there again?

Second Approach Gold Chart

As you can see, price held this level with a tiny breach, then bounced the next 4 days in a row, suggesting strong follow up buying on this rejection.  The first time back usually is a slightly lesser bounce since many know of the level, and thus less traders are trapped (or surprised) from a violent rejection the first time around.  But usually, this level will hold.

Remember, this is one scenario of how price has related to it in the past.  All the other types of reactions communicate a different story.

2) How Significant Is It (lower time frame, higher time frame, etc) - this really has to do with time as all support and resistance levels have what I call a 'time degradation' to them. Simply put, traders have a memory, but they are more inclined to take recent information as more valuable then information a while ago, especially if they are short term traders. Generally, higher time frame levels will dominate and last longer than lower time frame levels. Also, when possible, I'm more interested in drawing levels that are more likely to maintain the trend as that is the more probable scenario.  I particularly relate to these when reading the impulsive vs. corrective moves in the market.

But once you have established the trend according to the impulsive vs. corrective series, look for breakout pullback level where the trend continued, or major swing highs/lows where the trend paused and pulled back to.  These will often present great opportunities to get in with trend.

3) How Price is Reacting To It Now - Is price closing on a support level, and just sitting there, with smaller and smaller bounces off it? If so, a breakout through the level is more likely as there is no strong buyers able to push back, and the sellers continue to squeeze them out of the market.  Was there a strong pin bar reversal off this level?  If so, it could be telling you it will likely hold on a second attempt and start a reversal.  How price reacts to the level in the moment will tell you if it's likely to hold or not.

Often times the market will demonstrate a price action reversal signal at these levels.  Keep in mind, this is the 'effect' of how players responded to the level, not the cause.  Order flow was the initial cause, and the level was the location.  Everything else was a response to the initial reaction off this level.  But these price action triggers can often confirm the level will hold or break, so watch for these here if you want more confirmation.  Sometimes a price action trigger, say a pin bar on a 4hr chart can be an engulfing or piercing bar on a 1hr chart.  So sometimes it helps to look at a lower time frame to see what the more micro responses off this level are.

But no matter what, there will always be clues as to what the major players are doing at this level, and what the more likely scenario is.  Look for impulsiveness (strength) off the level, or weakness (corrective price action) off this level for initial clues.

4) What Is The Speed Or Impulsiveness Price Is Approaching The Level - this will really tell you a great deal of information whether a level is likely to hold or not.  If you are trading with trend, and with the move when it is approaching a level, how strong the move is heading into it, and what is the underlying characteristics behind the price action (speed, acceleration, etc), will tell you what is more probable.

If a level is an intraday level, or one from only a day ago, a really impulsive move is likely to break through it. If it's a daily low or high, or a level that held for a week or longer, it will have a better chance of holding. Think of it like a moving object.  Consider the size of the object in relationship to what the obstacle in its way is.  Normally, force x acceleration (& mass) will tell us whether the obstacle ahead will cave or not. Unfortunately, we do not have exact information about the orders at a level, such as the number and size of them which would equate to mass and volume of the object.  Level 2 quotes would help in this fashion, but if you don't have that, then what?

Why not use the other principles above, such as;
-how did price react there in the past
-how significant is it
-how is price reacting to it on first touch

Weigh those against the force, or impulsiveness of the move, and you'll be able to get a better idea.

A good example would be the following chart below of the AUD/USD on the daily time frame

Price approaches the level with some volatility, as there are solid moves on both sides of the fence with bears maintaining control on the way down.  Price bounces off the level with a piercing pattern and then a second attempt forming a pin bar reversal.  But then after a small retrace, price attacks the level with vigor, selling off 4 days in a row, taking out the last 13 days gains.  Does this resonate strength to you?  Do you think it will break?  See the chart below

Exhibit B

As you can see, price was exhibiting a lot of strength and impulsiveness heading into the support level. There were definitely some clues ahead of time this was going to break.  Such as how price barely lifted off the level each time, and attacked it twice without ever gaining much ground to the upside.

Keep in mind, the trend was already down leading up to it, so with trend traders used these pullbacks to get back in the trend.  The last time they said enough is enough, and went to take out the barriers at this level.  The buyers at the support level likely exhausted themselves on the first two rejections which failed to gain traction.

Putting all these components together would have communicated a breakout was likely, which would have helped your current short, or give you a second opportunity to get back in on a textbook breakout pullback setup for a high probability-low risk trade.

In Summary
So there you have a few key variables to look for in finding the best support and resistance levels. Remember, price action patterns form at these levels and are the 'effect', not the cause of the move. They do communicate information to us as traders, and often allow us to make high probability trades when we learn to combine them with key support and resistance levels. But it is these key levels where orders are being placed first.

Thus, by learning how to read the price action and the key variables I listed above, you can greatly improve your ability to spot good setups, improve your entries, placing trades where weak players are getting in, and the stronger players are looking to enter.

P.S. One of my most adoring fans recently commented on another article of mine how one could find more information in another book.  No shit, this is a two page article wherein I can only cover so much ground.  In a book, you can build for pages to cover key elements or go more in depth - so don't be childish, just take this for an introductory article on what to look for at key support and resistance levels.  Also keep an eye out for part 2 which is coming soon.

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Tags: action, and, bar, best, breakout, capre, chris, corrective, course, find, More…

Comment by ROBERT JOSEPH PAULO on June 14, 2012 at 12:43am

what immediately stood out for my in this, was the way you walk through the lesson, like an excellent presentation.  i actually have to write a report on anthropology and wad dtumped and i do believe that what i see in this form is a kind of excellence way to present information.

Comment by elanthiraiyan on June 14, 2012 at 6:23am

thks chris.. as always .. keep up ur good work... once i get enough money i ll def join ur course...

Comment by Romano on June 14, 2012 at 1:15pm

My problem is with trusting S/R on any timeframe. Way I see it is that there are too many levels and zones everywhere and every few pips. Or another fib retracement or extension. Thats why I feel sick to watch it all, its too much for me. Examples are nice but in real trading I have problem. Guess its my own flaw. Following ema20 seem so much easier to me.

Comment by Romano on June 14, 2012 at 2:03pm

Look for example at my pic. Its 4h eu. At 0 we see first impulsive candle suggesting very strong reversal. Price go up and pull back as by textbook at first. But then, at 1 we see strong move breaking previous resistance, yet it fail back about 130 pips at 2. Then its even stronger high at 3 which drop all the way back again, not bouncing from any previous highs formed as it should. Seem like somebody have unlimited liquidity to screw traders in any way possible, I dont have any other explanation. So how the hell can I trust SR? Sure, it probably hit some "another" level from previous downtrend or fib. Later it does seem to want to go higher, we see another bottom forming at 4, yet it did not even get anywhere and there is already another consolidation, although maybe bullish pattern. And thats 4h so lets count how many hours is price action doing BS and screwing traders. On top of that, price doesnt live up to expectations so far considering strong bullish impulsive candle at 0. Plus now it form higher highs and almost same lows, thats usually bearish. Also starting to look like bearish butterfly or head and shoulders pattern more and more. In fact, if it goes higher now, it will look even more mess to me seeing it did reversed triangle. So, looking at that mess, as price does not respect previous strong moves levels, how can I possibly trust SR and know which one I should? Sure, I could look for pinbars but I have found even that unreliable. Point is, considering strong impulsive candle up price is doing slightly higher highs and almost same lows. Then I see it react everywhere, at least every 50 pips on round numbers(just look at UCAD 1h right now), plus previous levels plus fibs. I really envy people who can read this mess with success. It seems to me that even RSI is more reliable than SR levels.

Comment by 2ndSkiesForex on June 14, 2012 at 5:37pm

@Skeptical - thanks for the kind words on the presentation style.  My publisher has been working with me on how I write the book so definitely some of the style in here.

@ Elan - coolio - look forward to working with you.

@ Romano - i've been under the weather so sorry for the delayed response.  Instead of me answering via charts and long explanations, how about I do a lesson on my next price action webinar which is scheduled to be tomorrow.  I may not be able to make it if I don't feel any better tonight, but Tuesday at my normal time for sure so come to that and I'll answer your questions, but to give you a short answer;

using S/R levels is not about expecting them to be a line in the sand that cannot be penetrated.  You read the key ones, and watch the live price action leading up to it which will give you clues as to whether it will hold or not.  I actually talked about this in my article several times so go back and read those parts.

But ill do an entire webinar on SR levels on Tuesday for sure so come to that and I\m sure you'll pick up some tips which will help.  Its a skill that can be learned for sure, there's probably just a few things that your missing but once you learn the key points, I think it will make it easier.

Kind Regards
Chris

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