Learning how to draw support and resistance levels correctly is an essential part of any successful trading decision.
Fortunately, there are several ways to draw support lines and resistance lines that allow any level of trader to assess the market and make great trades consistently.
By the end of this article, you will know how to draw the most common types of support and resistance levels, including how to incorporate them into your trading decisions.
What is Support?
A support level is the price level at which buying pressure is so strong that it acts as a floor, preventing the price of an asset from being pushed downward.
The mechanics of this relates to supply and demand.
First, imagine a scenario where supply outweighs demand. Of course, stock prices fall when this happens. However, the lower the price drops, the more compelling they become to buy.
Before long, buyers step in to take advantage of these lower prices until demand catches up with supply. At this moment, prices stop falling and find a floor. The price at which this equilibrium occurs is what we call a support level.
Essentially, a support level represents the inflection point at which buyers offset sellers, and the previous bearish trend reverses.
What is Resistance?
A resistance level is the counterpart of support. As the name suggests, a resistance level is a line that prices struggle to break above.
Essentially, the higher prices go, the more buyers become hesitant to purchase and sellers become emboldened to sell.
Sooner or later, sellers offset buyers in an equal amount, which is the moment that prices find a ceiling. This ceiling is known as a resistance level, which prohibits further price increases.
As such, resistance lines represent the inflection point at which a bullish trend comes to a halt and reverses in the opposite direction.
How to Draw Support and Resistance Lines Correctly
Understanding how to draw support and resistance lines is essential for determining favorable entry points, prospective price goals, and stop-loss locations.
When drawing support and resistance levels, it’s important to know that they don’t have to be exactly drawn. In many cases, a support or resistance level is subjective and “in the eye of the beholder”. This means that others may have a different interpretation of where to plot a support or resistance line than you.
Also, prices don’t always “respect” these levels exactly. Sometimes they trade through them slightly before reversing, and sometimes they don’t reach them in the first place. In other words, don’t fret if you can’t draw a line that perfectly connects all prices at their highs or lows to the exact decimal place.
Having said this, there are a couple of general rules you should try and follow.
Firstly, only draw “obvious” support or resistance levels. By this, I mean levels that prices clearly have a tendency to bounce off and reverse direction at. Don’t get trigger happy and draw so many lines that you can’t even see the underlying chart anymore!
On this note, the more times that prices bounce off, or “test”, a certain area on a chart, the more confident you can be that it’s a valid support or resistance level.
Secondly, you should draw your support and resistance lines so that they “touch” the most number of price bars/candles. I will illustrate this with a few examples below.
Horizontal Line
Horizontal lines are probably the most common and easy-to-spot forms of support and resistance levels.
They’re pretty self-explanatory.
Find a constant price level that prices have struggled to break through, and draw a horizontal line that extends across the whole chart at this level.
To explain this further, take a look at the next few images.
How to Draw a Horizontal Resistance Level Correctly
In the first image, you can see at least 5 points where prices struggled to break above the red resistance line and subsequently reverse.
This chart comes from Finviz Elite, which is a great technical analysis platform for beginners. It’s pattern recognition screener helps you find stocks trading near support or resistance lines. And, if you’re not sure how to draw support and resistance levels correctly yet, it’s automated trendlines help you visualize where they should go. Those looking for more advanced automated trendline analysis should check out my TrendSpider review instead.
Remember what I said earlier. The more times prices bounce off (test) one of these levels, the more legitimate it is. 5 times is more than enough to justify drawing a resistance line here. If there had only been 2 previous tests, for example, it would be a less reliable place to draw a resistance line.
Now, every time prices approach this level in the future, you should be wary of a potential reversal and be prepared to sell.
On the other hand, if prices manage to break through this level convincingly, then we should expect a sustained move upwards. The chart below is a prime example of this, however this is something I also cover in how to find breakout stocks.
How to Draw a Horizontal Support Line Correctly
The next image shows an example of a horizontal support line.
In fact, it shows 2 different support lines:
- The top line, labelled 1, touches the most number of obvious price bars/candles on the chart – a point I made earlier
- The bottom line, labelled 2, only touches 2 candles at the lows of the range
Both of these are legitimate support levels.
The 1st line acted as a good support line on numerous occasions, however there were also times when prices briefly dipped below it. This doesn’t completely invalidate it though, as more often than not, prices tended to reverse upwards here.
The 2nd support level represents the lowest point that prices got down to on 2 occasions. While this touches less points on the chart, it’s still useful to know the extreme lows that prices managed to reach in the past.
As you can see, interpreting support and resistance lines requires a bit of nuance. You need to be open-minded and flexible with your analysis. After all, technical analysis isn’t an exact science.
In this particular example, you should be a bit more forgiving with prices dipping below the 1st line, but stricter if they dip below the 2nd line.
The range in between the 2 support lines is actually known as a support zone. Essentially, any price within this zone represents a legitimate support level and potential buying opportunity. As such, when prices drift into this zone, you should think about taking a long position (as long as you think the support will hold).
Trendlines
Trendlines are distinctive lines that many traders draw to link a sequence of price bounces or demonstrate the best fit for specific price data. The trader can then use this line to get an indication of where the share price is heading next. TC2000 allows you to execute buy and sell orders automatically at trendlines.
Trendlines are similar to horizontal lines in that they connect highs and lows on a chart with a straight line. The key difference is that trendlines have a slope, while horizontal lines are flat.
Trendlines can either be upward sloping or downward sloping, however resistance trendlines bound prices from above, while support trendlines bound prices from below.
How to Draw a Resistance Trendline Correctly
The chart below shows both variations of a resistance trendline. The first line has a positive slope, while the second line has a negative slope.
In both cases, they simply connect multiple high-price-level points. The upward sloping line connects a series of higher highs, while the downward sloping line connects a series of lower highs.
As with any resistance line, these represent points that prices struggle to break above. However, when they do, prices can go on to make sustained moves upwards.
Interestingly, this is exactly what appears to have happened with regards to the second line.
How to Draw a Support Trendline Correctly
The image below shows you what a downward sloping and upward sloping support trendline looks like.
Let’s look at the downward sloping support line first.
As you can see, it’s drawn so that it touches the most number of low points in the downtrend – in this case 5.
Notice that prices don’t always bounce off this line exactly; sometimes they dip slightly below, other times they fall just short. However, hopefully you understand that this is perfectly fine by now. The important takeaway is that, historically, prices have struggled to break below this line convincingly.
The upward sloping trendline carries exactly the same logic. The only difference is that it connects a series of higher lows instead of lower lows.
In the example above, it only connects 2 of these points, which means it doesn’t hold much weight as a support line yet. In general, you want to see it connect at least 3 points for a more robust confirmation.
As a side note, the chart pattern between the upward sloping support line and the horizontal resistance line is known as a cup and handle pattern.
Moving Averages
Moving averages can also help identify support and resistance levels.
Moving averages take all of the prices from a certain period, average them out, and display them as a smooth line chart. Every charting platform should allow you to automatically plot moving averages, so you don’t need to worry about the calculations yourself.
This is great if you’re new to trading, as it removes a lot of the “guesswork” associated with drawing your own lines.
The 2 charts below have a 50-day (red line) and 100-day (blue line) moving average plotted on them.
In an uptrend, these moving averages act as support levels.
However, in a downtrend they act as resistance levels.
Round Numbers
The idea of drawing support and resistance lines at round numbers may seem like an oversimplification, however it’s really just basic human psychology.
In everyday life, people tend to round quantities up or round down in all sorts of situations. There is nothing scientific about this; it’s just a common heuristic we use for convenience.
Well, the same logic applies to trading.
Because people prefer to think in terms of round numbers, traders naturally gravitate towards these levels when planning their buy and sell decisions.
For example, imagine you bought a stock at $20 that’s now trading at $28.37. You believe the stock will keep rising, but think you should take some profits at some point – just in case! Unsure which price to sell at, you simply place a sell limit order at $30 and forget about it.
It’s precisely this line of thinking that causes waves of buying and selling to occur at round numbers. This makes them common places for inflection points to take place and support and resistance levels to establish.
For example, the chart of Tesla below shows a clear resistance level at $300 and support level at $100.
Fibonacci Levels
Fibonacci levels (otherwise known as Fibonacci retracements) are horizontal lines that help traders identify potential support and resistance levels.
These lines represent ratios, or percentages, that derive from the Fibonacci sequence – a series of numbers that come from a mathematical formula. Specifically, these percentages are 23.6%, 38.2%, 50%, 61.8%, and 78.6%. They show hypothetical retracement points of a previous trend (by the relevant percentage).
Why these work as support and resistance zones is beyond the scope of this article, but I will show you how to apply them nonetheless.
Thankfully, you don’t have to calculate Fibonacci retracements yourself. Every charting platform includes them as a drawing tool so you can automatically attach them to any chart.
All you need to do is select the Fibonacci indicator, connect the lows of a trend with its highs, and the retracement levels draw themselves.
Fibonacci Support Levels
This chart of the Japanese Yen shows you what they look like in MetaStock.
When you apply them to an uptrend, the Fibonacci retracements act as support levels on the way down.
Right now, it looks like the 50% retracement is acting as pretty good support, since prices seem to be rebounding here. Interestingly, it coincides with another horizontal support level that was already there (red line). Also, the improving RSI in the bottom panel is acting as another reversal signal.
Fibonacci Resistance levels
To draw Fibonacci retracements on a downtrend, you start at the high and connect it to the low. Now, the Fibonacci retracements act as resistance levels on the way up.
As you can see in the chart below, the 50% retracement is now acting as a good resistance level. Again, it’s interesting to note how it virtually coincides with another horizontal resistance line that was already there (red line).
