Support and Resistance as well as trendline: How to draw them

A lot of traders trying to build their strategy based on indicators such as moving average, MACD, RSI or mix of all of them. They forgot that when they are trading they are betting on the price which is the only right indicator. They are not betting on moving average being crossed or not, or if the MACD crossed the signal line or even if the RSI cross the 50 level or not. All these indicators are fine if they are used probably and as a confirmation for your trading the price action, but if they are becoming the main indicators they will end trade up with massive loss.

The only thing that can e consider as main tools that can be used in trading is the support and resistance and the trendline. The reason is not because these tools are help you to indicate the price movement, but because these tools are very good help for trades to tell her that in these are of trend lines and support and resistance the price always work in different way as expected like if it was going up then it might move to sideway or go down immediately, or if it goes down then it might shift its direction to move to the other way sharply.

These tools (trendline, support and resistance) should be drawn carefully on the chart. For the armature trades these will be just consider a punch of lines which will be placed on the chart whenever a level of retracement happen. But that is not the case. They are like a history for the previous price action against these levels and how it acts according to these level. So these level should be placed carefully and with concertation. Here is so tips that will help to how draw ( Support and resistance, as well as Trendlines).

  1. You should consider bigger time frame when you draw these lines. Not below Monthly timeframe even if you are trading in hourly based. Because Major support and resistance or trend line of monthly time frame will never be broken because trader juts think that she bought an engulf bullish candle above strong support in ( 1 hour, 4 hour or even daily time-frame). Below is an example of good entering in EURUSD in 4h time frame.
As you can see that was a good entry for swing trading

The above chart shows how the support created first with large engulf bullish candle and how the price traveled higher and then return to the same level and it also when it reached to that level another engulf bullish candle has been created which increase the odd successful swing trade to 1.1990 level. But the truth was not like that and here what happen

Price traveled for a while and then hit Monthly Down trend

As you can see in the above chart the trade that its idea created based on 4h timeframe, could not break the monthly down trend which is more stronger, and the price not reached to its previous support and resume its strength , instead of that it broke it and went low than that which resume the main down trend for the EURUSD. Check this article that I wrote about how to spot markets next move.

2. Traders should always consider volume when they draw supports and resistances specially for those who trade stocks. Because when price hit support or resistance with high volume that does not mean that the price will move to opposite direction immediately. It means that there is more liquidity at that level and there is high probability price will return back to that level and break it. It depends on the second hit for that level and the volume assigned with the price to decide if it was strong support that will make price go in opposite direction or if this level will be broke.

Price break a resistance with high volume

See in the above chart how does price make a resistance in Apple stock at 81.89 level when it hit it for the first time. Then price went down and then come back to the same level and almost hit it many times but with low volume. Once the price break it with high volume than previous days, it was valid breakout that lead the price to go up from this level which was 81.89 until it reached 140 or near to it.

3. Third approach that can be used in drawing support and resistance is when price moves in sideways. These sideways are consider the most liquidity place where volume is either accumulated or distributed and the next move will be decided inside these places. You only need to draw a rectangle surrounding these side ways and wait for price to break this rectangle and pullback to it and once its resume moving in the same direction with break out then engage.

See how sideways work as support and resistance

Mastering Support and resistance as well as trendline is not an easy job. Traders need to do it and practice it all the time in order to develop their price action based edge that will help them understand the market as well as making money out of it.

Impulse Vs. Correction wave: How to spot Market’s Next Move

Stocks market default move as all know is going up unless there is a correction move where prices will go sideways because people collect their profits or down when there is a problem in the company. But that is not the case in Forex Market where the move can be either up when the main currency is stronger than the secondary one or down when the opposite is true. In this type of market, traders who bet in the price action and its movement will find it hard to spot which move is the correct wave and which is the correction wave. It will be hard to know which one the actual direction of the price and which one is the correction of the actual move. The following is some tips that can be helpful for traders to spot which move of price is the impulse and which is the correction. Once these two movement have been identified trading will become more easier, because traders can stick to the original direction of price whenever an opportunity has been rises.

The first approach to identify the impulse and the correction is to use long time-frame such as weekly or monthly, and try to identify if the price in these time frame has multi[pl tested trend line. Once this trend line has been identified then the impulse will be always with the direction of that trend line, and the correction will be always in the opposite diction of that trend line. Like the figure below:

Multi tested down-trend line

Another approach to identify the impulse wave and/or the correction wave is using MACD. MACD has two lines, one of which is called the MACD line and the other is Signal line. When MACD line is above the Signal line and all above zero its an uptrend, and when MACD line is below the signal line and all below zero this is a downtrend. But what if the MACD is above the signal line but both below zero line, or MACD is below the signal line and all above zero line. In these two cases the market is in correction phase and once you identify the original trend you can wait until the correction phase end and the price start move with the impulse direction again . Here where you can use the MACD to see if the price impulsing or correcting:

 Above Zero lineMACD above Signal lineUptrend, impulse
Above Zero lineMACD below Signal line Correction in uptrend
Below Zero lineMACD above Signal line Correction in downtrend
Below Zero lineMACD below Signal line Downtrend, impulse
MACD and impulse and correction waves

As you can see in the below chart:

Note: MACD should be used as secondary confirming tool not as major tool. Never use it by its own, the only major tool that you can rely on is the price action and its movement.

Sometimes the correction wave has an impulse and strong wave where the impulse will be in the opposite direction of the general market, and the correction wave for this impulse is in the direction of market. Here where many traders loss their money in market specially in Forex where there is lack of volume. The only way that will help traders to avoid this types or trades is to make sure that they get in trade with the direction of general market impulse wave after the momentum of the correction wave is faded and that happened when the MACD line is crossing signal line or retrace back from it and all lines are either below zero( for Sell) or above zeros (for buy) which means that the market will resume in the main direction like the figure below.

One of the great tool that can be used to tell if the trend line (either was up or down) about to be broken and the correction wave which suppose to hit the trend-line and resume with movement of main trend line direction is about to become an impulse, is using a momentum tools such as (RSI). Once the price reached a down-trend such as the one in the figure below with high RSI that either at 70 or above , then there is a high probability that the price will valid break the trend line and move up in new up-trend and new impulse wave.

Price Hit Down Trend with RSI hit 70 or above

Those are some tips that might help traders in how to indicated which move is the correct one (impulse) and which one is the correction move. Trader need to stick to the original move and avoid trading in correction move especially if she is not experts. Because as I said before all money that traders make in the original move can be wiped of and more once the price get in a correction wave.