Thursday, February 19, 2009

Support & Resistance lines - How to draw

How does one draw support & resistance lines ?
Or how is a support & a resistance determine ?

The answer is - a lot of it is done visually. There is no particular
rule for it.

How most traders go about doing it is -

a. Look at recent swing highs & swing lows
b. Join two of them (highs or lows)
c. Extend the line
d. Now this line might act as a support or a resistance in future
e. Extend this line backwards & see if there were more such swing highs/lows near/at that line. If there are, its a confirmation that the line should act as a support/resistance.

Understand it this way

With one point (low/high) you cannot form a line. You wait for another point. With two points you can form a line - but it may not necessarily act as a support/resistance - there would be so many lines joining so many swing points - on the hourly chart, daily chart etc.

But with a 3 points on the same line, there is confidence that the lines is acting as a support /resistance.

What people also do it form parallel channels. So say they have a line formed from two swing lows. There is also a swing high somewhere in between. They will create a line running through this swing high & running parallel to the first line & then check to see it acts as resistance/support.

When enough traders do this, the line will actually act as one.

Traders look to take traders around these lines or book profits near them. Either ways it gives them an actionable event to do.

Another question - When forming trendlines on candlestick charts does one form a line using wick highs or bodies ?

Answer is - a trendline can pass through wicks, but not through bodies.