Lecture Notes: Drawing Support and Resistance Levels
Importance of Support and Resistance Levels
- Support and resistance levels are crucial for trading.
- Correctly identifying these levels can lead to high win-rate trade opportunities.
- 99% of traders get it wrong due to certain mistakes.
Common Mistakes
- Drawing too many lines on the chart, leading to confusion.
- Not following the "secret" rules of support and resistance.
Secret Rules of Support and Resistance
1. Multiple Rejections
- A level is more reliable if the price has reversed from it multiple times.
- Example: Price hits a level and reverses three times, indicating a strong support or resistance.
2. Movement Away from Swing Low or High
- Even without multiple rejections, significant moves away from swing highs or swing lows can indicate support or resistance.
- Example: Price forms a swing high and moves away significantly, mark it as a resistance level.
3. Levels Can Be Both Support and Resistance
- Support levels can become resistance and vice versa.
- Example: A support level that price reverses from multiple times becomes resistance once the price breaks through it.
4. Levels Must Be Near Current Price
- Draw levels that are relevant to the current price, not ancient or irrelevant levels too far away.
- Avoid clutter and focus on the most recent key levels.
Applying the Rules
- Draw resistance where the price frequently reverses near the current price.
- Identify areas with significant movements to mark support/resistance.
- Recognize support/resistance areas, not just lines.
Example Trades
Example 1
- Identify resistance: Price reverses at a certain level multiple times.
- Look for reversal patterns (e.g., Evening Star Candlestick pattern).
- Confirm with additional indicators (e.g., moving average crossover).
- Enter sell position, place stop loss above resistance, and take profit at the next key level (former resistance turning into support).
Example 2
- Identify support: Price reverses at a certain level multiple times.
- Look for bullish reversal patterns (e.g., Bullish Engulfing Candlestick pattern).
- Confirm with moving average crossover.
- Enter buy position, place stop loss below support, and take profit at the next key level (former support turning into resistance).
Conclusion
- Wait for multiple confirmations before entering trades.
- Utilize candlestick patterns and moving averages for better confirmation.
- Focus on the most recent key levels to avoid clutter and confusion in your charts.
Follow up video suggestion: Combining this strategy with candlesticks for better trading results.