So how do we find these S&R levels? It’s actually pretty easy, it just takes practice to get good at it. You just need to find and mark areas on your chart that price has trouble breaking through.
Let’s look at an example. Here is a plain Forex chart…
Looks pretty boring, doesn’t it? Now lets color in the area of resistance.
The blue area on the chart above marks a very strong area of support. I call these areas S&R zones.
We have 5 major price swings that have highs inside this S&R zone. Every time price goes into this zone, it bounces back down!
Below is the same chart, zoomed out so you can see what happens later and with an area of support added. You can see that almost every time prices gets down to this support level it stalls out and reverses… or breaks through and drops like a rock! You can also see that areas of support can can later become areas of resistance.
You may have noticed that I’m using what I call S&R zones, and not single S&R lines like a lot of other traders. Lines tend to be too rigid for me, because prices rarely bounce directly off a certain line. A zone is a much more realistic representation of S&R levels.
Now before we can take any trades we have to get our charts ready by drawing in our S&R zones. As a new Smart Money Forex Trader this is going to be the hardest part!
The thing to remember is that we are looking for areas where there has been a major price reversal, not just places that individual candles have touched.
Here is a GBP/JPY chart with S&R zones drawn by using lines in MetaTrade 4. This is exactly what the charts that I trade look like.
There are 3 S&R zones on this chart. You’ll notice I don’t color in the zones on my actual charts. Doing that makes the screen to cluttered for me, but you can do it if you wish.
After I get my lines drawn on my chart it’s just a matter of waiting for price to enter an S&R zone and give us a reversal signal.
Next we’ll see some examples of how we actually uses these S&R zones to trade.