Mastering Technical Analysis: Part 2
In Part 1 of this series we described the most important technical tool at a trader's disposal which in our opinion is the trend. Understanding and utilising trends should serve as a foundation to any trader's analysis. We now want to start building on this foundation by mastering what we consider the next most important technical tool at our disposal and that is support and resistance levels.
We define support and resistance levels as a precise level that price has tested 2 or more times. The more times price has tested the level and the more precise the touches are the stronger it becomes. These levels can appear from monthly charts down to 1 minute charts, with the higher timeframe support and resistance levels being the strongest. If we start to use support and resistance levels in our trading correctly it can be really crucial in increasing trade profitability. We look to use support and resistance in combination with trend which can be extremely powerful. One area which sets us apart from other educators is we only use horizontal support and resistance lines instead of sloping support and resistance levels. Horizontal support and resistance lines offers a precise level whereas sloping trends lines are very subjective in nature and are constantly changing. The below charts illustrate how we can start to recognise and mark out support and resistance levels on our charts.
The levels can be tested from above or below so those lines could actually be drawn right across the charts and you will notice in the diagram showing the support levels that the same levels marked out as support have also acted as resistance once the levels have been broken. That's one way we can use these levels in our trading, if we are in a downtrend and a support level is broken the probability is that if that level is retested it will act as resistance and price will continue moving lower. We use that precise level in combination with other factors to gain entries into high probability trades.
Support and resistance levels can act as backup for trades as explained above and they can also act as reasons to stay away from certain trades. If price is just below a strong resistance level and we are looking at trading long, the resistance level might put us off as the probability would be for price to test that level and fall off so if our target is above that level price might struggle getting there. The same goes for if we are looking to short a market that has a strong support level below price. We would prefer to wait until we are under that support level before going short as if that level is tested from above we would expect to see a bounce there. A simple rule to go by is we should look to go long above resistance and trade short below support. That way when we are in a trade we will avoid having anything in the way of our targets.
A good exercise to go through to help identify these levels is to start at a daily chart and just mark in the horizontal lines which have been precisely touched at least 2 times before. We have included the current NZDJPY chart as an example of a horizontal support and resistance line. As you can see price has reacted strongly in the past to the 90 level. Quite often the support and resistance levels do occur at round numbers as they are more of a point of memory for traders around the world. In the NZDJPY chart below we would only be interested in going long once we are above that 90 level as if we went long now the probability would be that we would continue to find resistance at this level. If we cleared the 90 level and price pulled back to that level we would then expect it to act as support which could build the foundations for a high probability trade setup.
So start integrating support and resistance levels into your trading in combination with trends. Mark out the major support and resistance levels on the charts you're looking to trade and make sure you are well aware of where price stands in relation to those levels. If you see an uptrend break through a resistance level and pullback to that level which acts as support, that serves for a great place to start looking to become a buyer. The opposite is true for a downtrend. Make sure you're not looking to trade long into resistance and short into support.
Happy Trading!
Regards,
The TWP Team
Follow Trade With Precision on: 
Receive more articles and videos like this straight to your inbox. Sign up for the TWP Free Newsletter!
Newsletter Archive
If you get a video not found error, please refresh the web page and try playing the video again. You may also need to update your flash player. If you still need help, email support@tradewithprecision.com.