Support and Resistance Lines (S+R lines)
What Are S/R Lines?
S+R lines are points at which the price finds a permanent or temporary barrier. What we are interested in are these temporary barriers. The S+R lines on all currency pairs have been around for decades. If you look back in your charts to the 1980s you will find that the same S+R lines that worked back then are still valid today.
So what exactly is an S+R line, and why would the price magically stop at some seemingly arbitrary horizontal line? Simply put, S+R lines are areas traders expect the price to have trouble getting through. The line only works because a long time ago the price happened to bounce away from it strongly. Therefore, the next time it reached that same price level, traders regarded it as a break opportunity or a price reversal level, and then traded accordingly. In other words, they thought, “The price bounced away from this line the last time. It might bounce away from it again, so I should be careful.” The more this happened the stronger the lines became, and now they are commonly viewed as areas at which the price will have trouble getting through.
How I use these lines
The basic idea of my method is to place these lines, and wait for the price to reach them. When the S+R line is reached, if it is broken, I expect the price to keep moving in the direction of the break. If instead, when it is reached, we start to see reversal patterns like LWP’s or GP’s form, I trade a reversal from the line. As I stated at the beginning of this e-Book, I like to keep it simple. You can now see that the foundation of my method is very simple, but is also very effective.
Placing S+R lines
Placing support and resistance lines is an art not a science. It will never be a science as long as humans are trading. Support and resistance lines are one of the most basic aspects to trading. Every trader uses them in one way or another. Each currency pair has highs and lows to which traders pay attention. As you develop your skill at placing S/R lines, you will need to be able to spot the price lines that would be most common to most traders. This is only done by practice and actively trading. Below is a basic outline of how I pick out my S+R lines. Keep in mind that there is a consistency to S+R lines; therefore, you do not have to pick them every week. There first thing I do when placing S+R lines on a bare chart is identify recent areas of support and resistance.
This is a very simple process. You just place a line at points at which the price has recently shown support and resistance. Typically you would look for three or more bounces from the same line. An ideal scenario would have the wick of the candle hitting the line, though; it is acceptable to use the candle’s body to place a line even if the wick has moved beyond the line. Even though the candle body is significant you cannot place a line based solely off of candle body bounces. The primary focus should be on the wick.
The next step is to scroll back through your charts and confirm the lines you have placed. Are they historically significant? By historically significant I simply mean that over the past few years has the price bounced away exactly from or near that line? You should be able to see a few bounces just about every time the price is in the area of that line. I usually go back about five years. You do not want to pick too many lines. You are only looking for the strongest ones. GBP/JPY lines should be a minimum of 100 pips apart. You do not need a line every 100 pips. Place lines only where you find them. In certain areas on my GBP/JPY chart I have about 250 pips between lines, so do not be afraid of large distances between lines. If you start placing weak lines to fill in gaps you will likely start taking bad trades based on those lines. Remember, you want lines that the most traders will observing as valid S/R lines.
Line Migration
You should also be aware that lines tend to migrate slightly over the course of a few months. They will move 30 pips up, then 30 pips down, so be ready to tweak your lines as time passes. Line migration occurs because occasionally a candle breaks past a line and then reverses, leaving a small wick 10-30 pips beyond the line. The next time the price reaches that level it bounces away from the new high formed by that wick. After a few bounces you will find that the price is more likely to bounce from the new level as opposed to the original S+R line. All you need to do is move your line to the new level, and use that new level as the S+R level.
You should also be aware that lines tend to migrate slightly over the course of a few months. They will move 30 pips up, then 30 pips down, so be ready to tweak your lines as time passes. Line migration occurs because occasionally a candle breaks past a line and then reverses, leaving a small wick 10-30 pips beyond the line. The next time the price reaches that level it bounces away from the new high formed by that wick. After a few bounces you will find that the price is more likely to bounce from the new level as opposed to the original S+R line. All you need to do is move your line to the new level, and use that new level as the S+R level.
How long do they last?
The same S+R lines have been around for decades. After you place them on a chart and get them right, all you need to do is adjust them to account for line migration. Other than that, your S+R lines should always remain pretty much at the same levels. Sometimes an S+R zone forms on a line. (I’ll explain S+R zones in the next section). When that S+R zone eventually becomes obsolete, it can form a new line and eliminate the original one. This however is rare, and when it does happen it is unlikely the original S+R will move more than 50 pips.
S+R Zones
What Are S+R Zones?
S+R zones are areas of around 50-100 pips in which the price tends to range. S+R zones are usually formed by tight ranging periods near an S+R line. The price ranges at the line for so long that the S+R line becomes useless, and a zone forms in the area the S+R line was in. Think about it as a disruption of the S+R line. After the S+R line is disrupted it can take a few weeks, or even a few months for it to return to normal. You will find that when the price approaches that area it will get sucked into a range, or it will bounce away from the area randomly. An S+R zone is no-man’s-land, and I rarely, if ever, take a trade at or near one of these zones. I simply wait for the line to return to it’s normal state.
How I place them
It’s very simple to spot an S+R zone. You will find that after the price ranges on or near an S+R line the line no longer holds the price back very well. You will see the price bouncing away randomly near the line and getting caught in ranges near the line. Keep in mind, S+R zones are rare, and just because you get some ranging here and there does not automatically mean it is an S+R zone.
As you can see in the picture above, we have the original S+R line in blue, and in green, the range that disrupted that line. After that, we see random reversals highlighted in red. If these random reversals do not average out quickly (1-2 weeks), and pick a single point to bounce from, I mark the area as an S+R zone. The zone is simply there to say, “The price will probably act erratically in this area, so stay out of the market.” Eventually, the zone will form into a single line, usually returning to the original line, or at least very close to it.
Scalp Lines
What Are Scalp Lines?
Scalp lines are temporary areas of support and resistance. As I have already explained, an S+R line needs to have a lot of history behind it to be useable. A scalp line does not need this same history. Scalp lines are formed by a single, sudden, sharp reversal. If a candle, for any reason, moves to, and then bounces away from a certain point, that point becomes a scalp line. Scalp lines can be used to take 4hr chart scalp trades. A good scalp line will have three essential parts, if a scalp line does not have these three parts I will likely not use it.
Preceding trend: The preceding trend required for a scalp line formation can be as short as a single candle, a single candle would however make for a weak scalp line. Ideally you would want to see a nice strong trend of four or more candles. The bigger and stronger the preceding trend the stronger the scalp line is. In the pics below the preceding trend is show in the blue box.
just the lowest point of the trend.
Reversal trend: The reversal trend confirms that the point at which the bounce candle stopped has some strength. If there is no reversal it is hard to say that it is a valid scalp line since
How I place them
Scalp lines are even easier to place than S+R lines. Just about every week you are going to see the price bounce away from random places on the chart. This can be caused by news releases, CB intervention, or other various reasons. All you need to do is identify these bounces and place a line there. Next time the price reaches that level and breaks that line a trade is entered. There are two main types of scalp line formations, and a third weaker type of formation.
Scalp lines are even easier to place than S+R lines. Just about every week you are going to see the price bounce away from random places on the chart. This can be caused by news releases, CB intervention, or other various reasons. All you need to do is identify these bounces and place a line there. Next time the price reaches that level and breaks that line a trade is entered. There are two main types of scalp line formations, and a third weaker type of formation.
‘V’ shaped bounce: To be more accurate, the ‘V’ shape can also be an upside down ‘V’. This is the best type of formation as it shows a very sharp and quick bounce.
‘U’ shaped bounce: The ‘U’ shaped bounce looks like the graphic you see below. It can vary a little,
but it remains generally the same.
‘L’ shaped double bounce: L-shaped bounces are weaker lines. To place a scalp line on an L-shaped bounce, it has to have bounced at least two times from the same line. I personally do allow for 1-3 pips difference. Taking GBP/JPY as an example, if the first bounce is from 212.83 and the second from 212.80 I will still use it.
Scalp lines can be placed almost anywhere you see one of these types of formations. The only time I would not place a scalp line is if it is too close to an S+R line. I have an imaginary 20 pip boundary on either side of each S+R line, and I do not place my scalp lines there. If any of these bounces form within those 20 pips I just consider it a bounce from the S+R line.
If you get a strong bounce from an S+R line, it does not make the S+R line a scalp. If a scalp line gets a lot of bounces, it does not become and S+R line. It just becomes a very strong scalp line. It is important to understand that these lines are two different types of lines and should be treated as such.
Another thing to take note of is how often a scalp line should be placed. Personally, I like to see a minimum of 10 candles between my scalps. For example, if you see two ‘V’ shaped bounces form, as in the picture below, you do not place a scalp line at both price levels. You place the line at the lowest bounce. Of course, you would place it at the highest bounce if it is an upside down ‘V’ shape.
If you get a strong bounce from an S+R line, it does not make the S+R line a scalp. If a scalp line gets a lot of bounces, it does not become and S+R line. It just becomes a very strong scalp line. It is important to understand that these lines are two different types of lines and should be treated as such.
Another thing to take note of is how often a scalp line should be placed. Personally, I like to see a minimum of 10 candles between my scalps. For example, if you see two ‘V’ shaped bounces form, as in the picture below, you do not place a scalp line at both price levels. You place the line at the lowest bounce. Of course, you would place it at the highest bounce if it is an upside down ‘V’ shape.
The 10 candle rule functions more as a guideline than a strict rule. You can place a scalp line at every minor bounce you see if you want to. If you do that though, you have to realize that the scalp lines placed on minor bounces are usually much weaker and your trade risk increases. Good scalp lines should be placed at the large, prominent bounces. They should mark the end of a trend. I do not place them at every single tiny bounce. I know this can seem very overwhelming at first, but after a few weeks you will be placing scalp lines like a pro. If you are ever unsure about placing a scalp line, simply ask in the Forex4noobs forum if the line you want to place is in fact a scalp line.
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