Support & resistance levels in the market are ubiquitous tools for traders of all varieties. Day traders, scalpers, swing traders, and others! however, they might be a little more complicated to find and draw than you would think, also to use at that!
A lot of traders use price action to identify support and resistance levels, which is a good starting point. However, there can be a more methodical desire to identify support and resistance levels; which is what we’re going to talk about throughout this article.
Support & Resistance Levels Using Price Action
The most common way to identify support & resistance is through price actions. The classic highs, lows, and impulse moves.
When traders see large rejection areas from highs or lows, there will usually be a support/resistance area plotted. When a level is tested multiple times, this will also warrant a support or resistance level. With the expectation that these areas are going to hold out again. There could be a lot of reasoning as to why this can happen, but most don’t understand.
At a key point of inflection, traders that run up the move or down the move will be met with the opposite end of the market. Buyers that cause a larger pop will see equal or heavier sellers come into the market which causes the point of inflection to be created.
The same thing for the downside that opens up, buyers of equal or heavier strength have to come in for that rejection to appear. This means, in the next test of that level, you will need to see those same initial market participants come in so that they defend their level.
If they fail there is going to be a huge buy or sell stop that explodes through the level. Traders shouldn’t blindly buy or sell these levels even though they’ve created a “support” or “resistance”.
There is merit to the price action approach. Here is an example of some of the scenarios we’ve talked about with price action. Before we introduced points.
In the image below, (META – Meta Platforms) we have yellow and blue lines which represent (yellow: large points of inflection) and (blue: multiple tests of an area). These are the two main support and resistances drawn based on price action. Keep in mind as mentioned before, that you will have large stops on the other sides of these points, no matter which they are. Which makes it harder to blindly trust the level will hold out.
Out of the two, points of inflection and multiple tests of an area, it is a little easier to identify if the multiple test support and resistance levels will hold than the massive initial rejection. If a level holds twice, there is a possibility it holds a third time, but maybe not a fourth. If a level holds once, the possibility of it holding again is more unknown.
In this case, you will have to identify qualifiers. Which can come in the forms of volume, candlestick patterns, certain candlesticks themselves, and even multiple time frame analyses.
Multiple timeframes and price action support and resistance:
Traders can also use multiple timeframe analysis when drawing support and resistance based on price action. This is mainly dependent on the type of trading style the trader uses. For swing traders, using weekly, daily, and hourly levels to identify levels and use them as guidelines for positions is fairly standard.
Take a look at GOOGL below, on a swing perspective we have a weekly (most left chart), daily (top right), and hourly (bottom right). You can see where the support and resistance lines have been drawn based on price levels and price action. The further down the timeframes you go the more levels you will be able to see based on price moves and volume profile to refine entries.
Day traders on the other hand focus on smaller time frames (intraday), usually starting from a daily, dropping from hourly to 10-minute intervals and more. The key to multiple timeframe support and resistance levels is that as a trader, you should consider that the support and resistance levels are going to look slightly different on different timeframes. These are going to be more short term levels that you need to trade intraday rather than getting caught up on the longer frame.
Below is a multiple timeframe example of AAPL on the daily (most left), hourly (bottom right), 10-min (top right).
Support & Resistance Levels Using Volume Profile
Using price action and market structure to identify support and resistance is usually a starting point for traders to find levels to trade-off. However, we can go a step further and introduce volume profiles for support and resistance levels.
For more information on the volume profile, you can read through this basic article.
We won’t go through too much of the volume profile’s basics. Here are the key aspects everyone should know about the volume profile:
- Volume profiles are made up of distributions (value areas and “bellies”).
- Volume profile distributions are surrounded by thin volume nodes
- When volume profiles drop off from heavy volume to thin volume traders call this a ledge. (resembles a shelf).
- Volume distributions are made up of high-volume nodes.
- Price is attracted to volume, and distributions are known as balance.
- Price wants to stay in balance.
- If the price escapes a balance area, there will be an extension through imbalance and in search of another balance.
The question is how can we identify support and resistance levels using a volume profile?
One of the best ways to use the volume profile is to identify where the distribution blocks are, that is because they will be wedged between two ledges, these will be your support and resistance levels.
A distribution block on a chart (volume profile) looks like a belly, understanding where the distributions start and end can help traders find support and resistance levels to trade-off. You can just simply add horizontal lines where these ledges lie to find the areas you want to trade.
Take a look at the example below (using the long-term volume profile chart that is on the farthest right side of the chart). We’ve identified 3 distribution blocks. Yellow, red, and blue, the ends of these blocks are ledges that can be used as support and resistance areas on the volume profile to trade off. Even though you can use price charts and action to find levels, combining that with volume profiles will show you where the price actually wants to stay and move towards. This is a really powerful technical analysis tool.
When you identify these levels you can tie in the multiple time frame analysis to develop trading strategies.
Some might include:
- Fading the tops and bottoms of distribution blocks. The ledges of distribution might be preventing the price from passing through which can be a good counter-trend trade.
- Letting price accept into distribution blocks and looking for the other side of that volume profile distribution.
- Waiting for a key distribution block to break (that is next to low volume)
Overall the probability of finding good levels with the combination of volume profiles and your price action understanding will not only help you find good areas to trade off and target but also the direction of the market, or its anticipated direction.
Volume profiles are TRADEPRO Academy’s bread and butter, we teach extensive distribution theory and use them on a daily basis. If you want to learn more check out our rooms and courses.
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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO AcademyTM is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.