The Important of Historic Support and Resistance


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Video Transcript:

Hello traders. Welcome to the first module of the Advanced Technical Analysis Course where you will learn all the basics on technical analysis. On this lesson, you will learn the importance of historic support and resistance levels. First of all let’s define what support and resistance is. Support and resistance are levels that have been tested at least twice. The more times the level has been tested and rejected the stronger the level is. Immediate support and resistance are levels that have been created in the short term. Let me explain what this means. The immediate support and resistance levels are levels that you can see on the 15-minute chart for example. Let’s say that you are day trading the EURO/USD and then you have a level where price came down and tested it once and twice that is an immediate support and resistance.

Historic Support and Resistance

And the immediate support and resistance are strong on a day to day basis, maybe on a weekly basis if price is not moving a lot. But historic support and resistance are points of inflection in the market. Now this is where all the difference comes into play. Immediate support and resistance are levels that can or cannot be broken easily. And historic support and resistance are points where the price has already been tested countless times in the past.

These levels are found on the four hour, daily, and weekly chart. Why is it that the historic support and resistance are drawn on the higher time frames? Well, that’s easy, because on the higher time frames you get rid of all the market noise. All you have is the pure market structure. And you will see the actual points of inflection or points where the market was rallying or dipping partially and turned around. These levels are very strong and must be utilized with attention when trading and analyzing the markets. Why are these levels strong? Because there are a lot of traders looking at these levels. So there will be a lot of sell or buy orders at these levels and this means that price will react to these levels.

Contrarily the immediate support and resistance might work for a day trader but the institutions are looking at every support and resistance that is created on a 5-minute chart or on the 15-minute chart. Institution of traders only care about the overall market structure and the overall moves. So if you don’t pay attention to these historic support and resistance levels you might actually be in a good trade or a profitable trade that instantly turns on your in the middle of nowhere. Meaning that you hadn’t drawn and support or resistance levels there but the market just turned around without you even noticing. And this is what happens to beginner traders. They only use the immediate support and resistance levels and they trade off of it.

No. In this course you will learn how to use not only these important points of inflection in the market and the immediate support and resistance levels but you will learn how to use them in confluence with everything that you will learn here on this advanced course. And I think that the best thing that we can do here is go straight to the charts and try and look for some historic levels or maybe start with a 15-minute chart and draw immediate levels and see where the market actually turned without you noticing. Okay, here’s my MT4 platform. And we have the major currency pairs on this profile. You can see that I have an updated; the futures contract on the crude oil but it doesn’t matter because we are only going to look at the ForEx market and maybe the S&P 500 in bold [SP].

So let’s start with the EURO/USD, shall we? So this is the 15-minute chart on the EURO/USD. What we’re going to do here is we’re going to draw horizontal lines on immediate support and resistance levels. Okay? And we’re also going to draw horizontal lines on historic support and resistance levels or what we like to call inflection points in the market.

The difference is that we are going to use just black think horizontal lines for the immediate levels and we’re going to use green and thick lines for the inflection points. So let’s start. Let me just get this up a little bit. Okay clearly here we have an area of resistance that was tested and it’s being tested here again. Now the thing about this is that we also have an area of support right here. Remember that support and resistance levels, and this I think you already know because this is not an advanced thing to know, but a beginner concept to grasp is that support and resistance levels are not lines, but levels okay? Sometimes you might get spikes up or spikes down.

Or in the lines that you draw, but what you need to look for is true rejection like in this case on 15-minute chart we went all the way back down to this swing low. But this candle closed outside so some of you or some, most of the beginner traders would have taken a short position here without confirmation of an actual breakout. Okay? And then what happens? You have a blue candle that opens and closes above this swing low which means that this is a fake out and you actually are in a losing trade. But we are not looking at this right now, we are looking at why it is important to look at higher time frames and look for inflection points in the market.

Now let’s assume that we are here, we are trading here, and we see that price comes all the way down, once, twice or three times. We have a little consolidation here and then we move all the way up. Okay? And since this area of support is rejected we decided to go long here and our trade is going perfectly, okay? And then what happens? We came all the way here and boom. Price reversed on us and moved all the way down to an immediate area of support. Or support, this one is one that has been tested once, twice, three times and now four times. Okay? But why is that this price moved sharply from this level to this level? Or why is it that price rejected the 36.66 area once, twice, and three times you can see it here by the wicks of the candles and then, an engulfing candle that signals a reversal where we did not have any support or resistance lines. What we need to do is go to the four hour chart and let’s look at the four hour chart. Okay? Shall we? Now the four hour chart gives us an area that might be of interest to us.

Support and resistance

It is this area right here which we are going to color a green thick line because this is a swing low in the market and if we continue you can see that it is in fact an area of support. Right here. And if you go, if we go again further back on the four hour chart you can see that this area was held at support here too on December 23rd it was held as resistance during the second week of January and at the end of January it held out as resistance too, it was tested as resistance on February 10th, then as support on February 25th and then right here it barely touched it before going all the way up. Of course we can also draw another area of support right here.

You have one test, two tests and you can see that this line of support in confluence with this line of resistance and support right here form what we call the area of support that price has to test and reject for us to get long on the four hour chart. This trade would have yielded easily about 190 pips. Okay? Now we have our historic areas of support and resistance now we’re going to go back to the 15-minute chart and just let me go back quickly and here we are on the 15-minute chart you can see and you can clearly see the price went all the way up to this inflection point in the market and of course it didn’t touch it because remember that support and resistance are areas, they’re not lines.

The orders might have been, sell orders might have started at the 36.665 all the way up to the 36.7035. So, of course if we don’t have this inflection point or this historic line of, not resistance but previously tested as support and of course as resistance too we wouldn’t know that we have to put our limits or take profit levels around it. And we missed on the trade and of course we leave a lot of money on the table and if we are not disciplined enough we can even lose money if we let the trade go all the way down here. So this is why historic levels of support and resistance are important and the best thing you can do is actually go to your charts and go back, go back on your charts and see which levels have been tested once, twice, three times, four times as support and broken then re-tested as resistance and draw them. And then if you are analyzing price action on the 15-minute chart, you will see them because you will draw them in another color and with a thicker line. So this is actually what we wanted to teach you on this lesson. Stick with us because this is getting very interesting.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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