Support & Resistance to Predict Changes in Direction

14. What are support and resistance lines?

supportTo the right is a forex candle chart. There are matching red (resistance) and green (support) horizontal lines. In each section the red lines extend out from the highest wick and the green lines extend out from the lowest wick. During trading hours 5 days a week these are updated on CashTrap every 30 minutes.

Support and resistance lines help to predict whether a market will go up or down.

If you are looking at a bull market, you will notice that the candles will not seem to be going above a certain point. This is called resistance. When you are in the resistance area, you are looking for a put. The market does not seem to want to get any higher.

At the bottom there is an area in which the candles do not get any lower. This is called support. The market does not seem to want to get any lower. When you are in the support area, you are looking for a call.

If you want to buy in this bull market, ideally you would buy in the support area and sell in the resistance area.

Where to start

To draw trend lines, you may want to go to your forex broker’s website, choose the pair you want to mark up, choose a larger time frame and work down to the smaller time frames.

For instance, if you usually use 5 minute candles, look at 15 minute candles and connect 3 points each to create support & resistance lines. Then go back into the 5 minute candles.

In the example to the right, I went into and drew support and resistance lines going from 4 hour to one hour to 15 minutes and 5 minutes.

Note that for each of those time periods all of the support lines are the same.

As you may have noted in the breakout-retest blog post, a present resistance often becomes a future support and a present support often becomes a future resistance.

The software probably varies from broker to broker. With Videforex you click on the trend icon near the upper left-hand corner. Then click on a beginning of a line and drag to the right to and click to form the end point. Use the colour palette to select green for the support line and red for the resistance line.

You would mark up the graph on the left first and then the 5-minute candle chart on the right. Note that the support lines for the one hour chart and 5 minute chart are almost identical. That is because these candles are within a downward trend.

The support and resistance lines should be at the ends of the wicks if there are any.

Steve’s strategy

My friend Steve is doing so well with HFX that he has put his notice in. He’s going to quit his job on April 8 and start trading HFX full time so that he has more time to spend with his kids.

supportHe trades only during consolidations. He says there will be maybe 4 troughs and crests followed by a breakthrough. After the third wave he stops trading. There could be a breakthrough.

He goes to to draw his support & resistance lines.

supportI’m going to experiment with this strategy as follows:

  • On my broker’s website, find currency pairs that both pay out at least 70% and are on the list of currency pairs found in Cash Trap.
  • Find pairs whose trends end up in around one and a half waves of consolidation.
  • I will immediately go to Cash Trap to see how that pair is doing.
  • supportIf it has 5 points, I’ll invest 1% of my account, 6 points is 2% & 7 or more points is 3%.

That last bullet combines both intelligent risk management and the amazing wonder of compound interest.

Next blog post                Return to blog index