How to Find Support/Resistance Zones.
Zones are those spots on the chart where price has repeatedly reversed. However, it may be difficult at first for you to find these zones on the chart. There are several sneaky shortcuts that you can use to help develop an eye for finding zones. Some zones are extremely obvious and easy to find. Other zones are a little bit trickier and may be difficult for you to identify if you have not had experience finding zones on the chart. Please keep in mind these three shortcuts when you are drawing your zones on the chart.
- Start with a higher timeframe chart.
- Use a line chart to find the zones on the chart.
- Ignore minor zones.
Use a Higher Timeframe Chart
Question: When you meet someone new, how do you decide what they are like? You learn their history, you ask people about them, you try and decipher what they have done in the past, in the hopes of understanding them better. Why do you do this? The implicit assumption is that they will do the same things they have done in the past in the future. Markets are no different. When the market is on a runaway uptrend, traders look to the older charts to see where the critical zones are on the chart. This is also where we see history repeat itself, over and over and over again.
This shortcut for finding zones on the chart will work regardless of the timeframe you are trading. Simply move up one timeframe. This is a very powerful method for finding the most important zones on the chart.
Examining the higher timeframe chart will enable you to identify zones that will be the most critical areas on the chart for the timeframe you choose to trade. A few touches on the higher timeframe chart will translate into many touches on the lower timeframe chart. This technique will work on any timeframe chart.
Take a look at Figure 4.7, the GBP/USD one-hour chart. This pair has made an extreme low at the 1.6291 level. This touch at 1.6291 suggests the market has made a significant low, and this level may become important later. You may recall that extreme touches (lows or highs) are also critical zones. Although most zones will have touches from above and below (support and resistance touches), touches at extreme levels are also very critical, such as the extreme low in Figure 4.7. Later, the market will often come back to these extreme levels.
A month later, the GBP/USD four-hour chart (Figure 4.8) suggests two very interesting conclusions. First, the market has indeed found support and resistance on the 1.6291 level; the market has a memory. Second, the four-hour chart shows a very clear perspective for this market. Moving up to a higher timeframe is an excellent way to gain perspective. Only the most important zones will become evident on a highertimeframe chart. If you are using Meta TraderTM for your charts, you will have the following time frames available: one minute, five minutes, 15 minutes, 30 minutes, one hour, four hours, daily, weekly, and monthly. Thus, if you are trading the one-hour chart, a move up to the four-hour chart will help to identify the critical zones. The GBP/USD zone at 1.6291 is clearly a critical zone, as the market touches this zone more than six times over the course of one month (Figure 4.8).
This brings up an important point about zones. The importance of a zone is directly related to the number of touches on that zone. So, for instance, if a daily chart shows a zone with five touches over the past year, this would indicate a very critical zone on that particular chart. Here is another example: Notice on Figure 4.9, the EUR/CAD daily chart, that the 1.4350 zone has served as resistance three times over two months.
Moving back a bit further, we see in Figure 4.10 that the 1.4350 area was an area of resistance seven months prior to the recent touches on the zone.
If we go back even further, we can see in Figure 4.11 how there are many touches on this very same zone, the 1.4350 zone, as price has found both support and resistance on this zone. These touches occurred on this very same critical area, the 1.4350 area, almost five years prior.
Some traders will say that old zones no longer matter. Traders say things like “things have changed,” or “with inflation these old levels do not mean as much anymore,” or “why would the market remember a level that it has not been to in over a decade?”
If this is currently your way of thinking, I would encourage you to take a close look at the zones on a chart 15 years ago. Just scroll back on the chart, do not consider the current price. Draw your lines on the chart based on where you find support and resistance zones 15 years ago. If your chart doesn’t go back 15 years, try to go back at least 5 to 10 years. You should be able to identify critical areas on the chart from a long time ago. Now scroll forward and you will see that price in the future bounces off of these support and resistance zones. The chart has a memory. As amazing as this may sound, it is true: Price has a memory. This is true for any market, on any timeframe. I hope you go out and see this for yourself. Please do—your future as a naked trader may depend on it. The markets do remember the critical zones, this is why it is important for you, too, to remember these critical zones.