What is a level of support or resistance?
A support and resistance level is simply a level in a market at which traders find a price to be overvalued or undervalued depending on current market dynamics. This creates a level in the market that can act as support or resistance depending on various factors surrounding each currency or asset.
A price action trader might define support and resistance levels as a level at which we can look for price action buy or sell signals such as the pin bar which shows a strong rejection of a price level.
We aren’t concerned about why a level has formed. Instead, we’re focused on how important that level is relative to the surrounding price action. If it’s deemed to be an important (or key) level that we want on our chart, we simply wait and watch for a price action buy or sell signal to develop.
Typically, these levels are formed at price points where there is local demand or supply (often referred to as liquidity) for the asset or currency.
Here is a great example of a support and resistance level in action.
Support and resistance levels aren’t always exact levels. In fact, most often these “levels” are better thought of as areas on your chart. There is some debate as to whether you should use open and close prices to draw support and resistance levels or the high and low prices. The author of the 3CR method believes that the open and close prices are better but others, like myself, prefer to use the high and low as the ultimate rejection of a price level.
It’s a common misconception that a key level has to line up perfectly with highs and lows. However most support and resistance levels have areas where the market failed to respect it as either support or resistance. This is the reason you use price action patterns such as the pin bar as confirmation that a level is likely to hold.
Note that once a level of support is broken it becomes a resistance level and when resistance is broken, it becomes support. In this way, support and resistance levels don't die or fade away and even old levels remain important.
Here are a few simple rules to follow that will vastly improve your ability to identify key areas of support or resistance.
1. Use swing highs and swing lows in the market to your advantage
By using the highs and lows as a guideline to start drawing your support and resistance levels, you’re more likely to capture the “key” levels. These are the levels that you should be interested in as they are the most likely to produce a valid price action buy or sell signal.
2. Don’t worry if the highs and lows don’t line up perfectly
Remember that most levels are not going to line up perfectly with highs and lows. Instead of worrying about a level lining up perfectly with highs and lows, you should spend some time making sure the level is at a place in the market that achieves the most touches on either side of the level.
3. Focus on the major (key) levels in the market
These are the most obvious support and resistance levels and should be immediately visible. If you have to search long and hard for a level, it probably isn’t worth placing on your chart. By only focusing on key levels you’ll be in a much better place to actually trade a price action signal when one shows up.
4. Historical levels matter
Some traders like to use recent support and resistance levels i.e.within the last 6 months but the #3crSqaud like to use Weekly,Monthly and even Yearly open and close (or high and low) levels to identify potential trade exit points. These historical levels have proved to be as potent as recent levels.
The great news is that its possible to code indicators to locate horizontal levels of support and resistance for you. If you go to our indicators page, you'll see
3CR Support & Resistance- draws short term support and resistance
3CR Support & Resistance Zones - draws support and resistance zones with MA filter
Dean's Lines - draws historical price levels
3CROpClLines - draws historical Open and Close levels
3CRHiLoLines - draws historical High and Low levels
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