Make no mistake about it, inside of every profitable Forex trader is a strategy for drawing support and resistance levels. While many traders, including myself, have done it so many times that we often overlook exactly how we do it, there is always a method to our madness.
However, we have already discussed those topics before. So today I want to cover something much more controversial and enlightening – the idea that it is okay to re-position your support and resistance levels.
I can already hear the gasps of horror.
Yes, it really is acceptable to re-position the levels on your chart, but only if you have good reason to do so, which is exactly what you will learn in today’s lesson.
Becoming a consistently profitable Forex trader is a process, not a project. It is not something that can be accomplished overnight or even within a few months, no matter how hard you work at it.
It takes years to develop the skill set required to build a trading account from the ground up. Similarly, it takes years to train your eyes to be able to spot true levels of support and resistance, which is the foundation of any profitable Forex trading strategy.
While it may seem like some traders were born with the gift of being able to effortlessly extract money from the markets, I assure you that they had to experience the same growing pains that every trader must endure before reaching the top.
Part of those growing pains involve getting it wrong, and nothing is more subjective and therefore prone to mistakes than drawing support and resistance levels.
But that’s okay. Your goal should not be to get every level perfect the first time around. Your goal should be to mark the levels to the best of your ability while staying open-minded to the idea that you may be wrong.
While this may sound counter-productive, I assure you that it is not. Thinking this way prevents you from falling into the “ego trap” of feeling that you are always right. It also allows you to use the market’s own movement to confirm or negate your key levels.
Here is a recent example where I was wrong about a key level on GBPUSD. I was initially using the 1.5465 handle based on several former lows.
It’s little wonder why I liked this level. As you can see from the chart above, the pair had tested this area as support on multiple occasions.
However a few weeks later, GBPUSD decided to retest the 1.5465 level as new resistance. By the time the second session had closed following the retest, I knew there was a good chance that I had my level in the wrong spot.
The price action below is what tipped me off.
As you can see from the chart above, the market closed above 1.5465. However, instead of respecting it as new resistance the following day, it closed 17 pips below it.
While this could have been explained as a simple false break, the inconsistent price action was reason enough for me to at least question the validity of my level. As such, I began moving it around to see if the market was indeed trying to tell me something.
Sure enough, upon further inspection, the 1.5475 handle looked more appropriate given the price action that had unfolded over the last several months.
Although it was just a 10 pip difference, I felt much more comfortable using 1.5475 going forward as it appeared to be a better representation of value.
Notice that by moving my key level just 10 pips higher, I was able to better represent the previously mentioned candle and gain an extra touch off of resistance (arrow to the left in the chart above) in the process.
One of the most damaging mistakes a Forex trader can make is to know they are right about a key level, regardless of how the market responds. This way of thinking prevents them from using the price action that unfolds as a way to confirm or negate the levels they have previously drawn.
Think about it this way – what is arguably the most subjective topic when it comes to trading?
If you guessed, knowing where to draw your levels, you are absolutely right!
Some may argue that knowing where to exit for a profit or even where to enter a position are the most subjective, but those two things rely heavily on support and resistance. After all, if you don’t know where the next level is, how will you determine when to enter or exit a trade?
In fact, if you think about it, many of the hardest parts of trading, aside from the mental game, start and end with where you draw your key levels. This is why I always say that 90% of your time should be spent learning how to draw these levels properly.
But, once you learn this skill that is half science, half art, you need to be extra careful.
Why, you ask?
Because sometimes the resulting confidence can be more damaging than lacking the skill itself.
Confidence is a key ingredient in order to become a successful trader, but when confidence turns to stubbornness, you have a serious problem on your hands. If not acknowledged and treated right away, it can do some serious damage to your account balance.
Your job as a Forex trader is never to know what will or will not happen. Thinking this way allows your ego to step in and begin to control your actions based on emotions rather than technical factors in the market.
If we apply this logic to drawing support and resistance, your job as a trader is not to know beyond a shadow of a doubt that your levels are correct. This way of thinking can lead to stubbornness, blinding you from what the market may or may not be telling you.
Instead, your job is to mark the levels to the best of your ability given the price action in front of you, knowing that you could very well be wrong. It could be a 5 pip mistake or a 50 pip mistake, but the market will always let you know as long as you keep an open mind.
The market is dynamic in that it is always changing. This is especially true for the Forex market as it never truly closes.
With this in mind, maintaining a fluid approach to marking key levels on your charts makes a lot of sense. After all, you wouldn’t want to adopt a static approach to something that is dynamic like the Forex market.
A previous article of mine which talks about how to confirm key levels using swing highs and lows is a perfect example of using a fluid approach. In essence, you are using the market’s own movements to confirm or negate your levels. If a predetermined level is respected for a second or third time, the market is telling you that it is a level worth keeping an eye on.
If, on the other hand, the market does not respect a predetermined level, chances are you may want to revisit that area in the market. More often than not you will find that a revisit will offer you a chance to find a better area than the one previously marked.
Becoming a great Forex trader is not just about using past price action to “read” the market. It’s about using past, present and future price action to help stack the odds in your favor
Once you realize that it’s okay to modify your key levels based on the price action that unfolds, it can be all too easy to get carried away with it.
This often happens when traders begin to move levels in an effort to make a particular price action signal a favorable trade setup. An example would be moving a support or resistance level closer to a pin bar in an attempt to make it a favorable opportunity.
The chart below shows how a support level was moved to the tail of a pin bar, however that level doesn’t quite represent a former high. As expected, the bullish pin bar fails shortly after forming.
Truth is, pin bars occur quite often. But what makes a pin bar a profitable signal is not the pin bar itself, but what it represents relative to support or resistance.
The tail of the pin bar is what tips us off to where the supply or demand is in the market. But this type of signal is only valid if it occurs at an area of value.
This is why I always advocate placing your levels first and then watching for bullish or bearish price action. Otherwise, it can become confusing to determine which came first, the level or the pin bar?
Some may not agree with this approach, and that’s okay. Like many things when it comes to Forex trading, the degree to which something works for you is dependent upon how it fits with your personality and overall trading style.
That said, my experience has shown time and time again that allowing for the re-positioning of support and resistance levels as the price action unfolds is a crucial element to proper technical analysis. It allows you to use the market’s future movement to confirm or negate the levels you have already marked.
However, with the ability to re-position these levels comes a greater responsibility, which in turn requires a greater degree of discipline. It becomes all too easy to re-position a level so that it compliments a random pin bar rather than using the pin bar to validate the level.
The key to moving these levels is to do so without a bias. Never move a level of support or resistance in order to qualify a trade setup. Instead, do it based on new price action that provides enough evidence to prove that the new price is more valid than the last.
What do you think? Are you ready to add some flexibility to your Forex support and resistance strategy?
Leave your comment or question below.