Have you ever been stopped out by a pip, or even less than a pip? Just missed that magical entry? Chances are you are still looking at support and resistance as a single horizontal ‘line in the sand’. Because forex is decentralized, the single line method can be very hit and miss. You might have identified support at 108.83, but on another trader’s terminal with a different broker, the support line lies at 108.80. This illustrates the inherent imprecision when treating support and resistance as rigid levels.
In this tutorial, we’ll introduce the concept of support and resistance zones, teach you how to draw them in MT4, and hopefully give you some ideas on how you can use this method to improve your trading by recognizing these dynamic areas of price action instead of relying on pinpoint levels.
There’s two and there’s a zone in between! Nothing in forex is exact, no technical indicator or analysis method is perfect. Once you realize this and become a little more flexible with your stop losses and limit entries, aligning them with the reality of price fluctuations around support and resistance areas, you will likely see a huge improvement in your trading performance.
Introducing
Support and resistance zones are gaining a lot of traction in the trading community because they work so well. They go by different names; you may have heard them described as ‘supply and demand zones’ or ‘order blocks’. The core concept, regardless of the name, is very simple: instead of trying to find the be all and end all, ‘line in the sand’ which designates support or resistance, you identify the area of a chart where price is likely to turn. This is where the focus shifts from precise lines to areas of potential price reversal, reflecting the true nature of support and resistance dynamics.
Here’s an example of a traditional support line drawn at a daily close level on the AUDUSD pair:
If you had set your stop loss at this level, or even a few pips below, the market would have stopped you out. You might even have entered a short position on the apparent break, and the market would have stopped you out again. This demonstrates the pitfalls of relying on exact support levels.
Now let’s take a look at what would have happened if you were treating support as a zone, rather than a line in the sand:
A reaction was very likely within this area, but pinpointing the exact price point is difficult.
This highlights the advantage of using support and resistance zones over singular lines.
This is the paradox of supply and demand zones – and, indeed, support and resistance zones: though you are no longer attempting to identify support and resistance levels with pin-point accuracy, they actually improve your entry and stop-placement accuracy, acknowledging the inherent flexibility of these areas.
Drawing Support and Resistance Zones in MT4
Drawing support and resistance zones in MT4 is easy, though you will have to make a quick customization to your standard toolbar. Simple right-click your standard charting toolbar and click ‘Customize’:
You’ll then want to select the ‘Rectangle’ tool and click ‘Insert’:
You should now have the rectangle tool available to you in your toolbar:
Tip: the default color for your rectangles will be a dark blue, you’ll want to select a light neutral color like the ‘Lavendar’ used above to keep your charts looking nice and clean.
Now you are all set up with the rectangle tool, you can set about identifying support and resistance zones. Just like with traditional method, the basic idea is to find areas where price has reacted before and is likely to do so again. You then mark these areas on your chart. It is key to recognize the area where price has previously demonstrated a tendency to find either support or resistance.
Generally, if drawing a resistance zone, you would extend the zone from the lower part of the candle body, all the way up to the high of the candle. Here’s an example:
Conversely, when drawing a support zone, the zone would extend from the low of the candle up to the highest part of the body:
Note this is more art than science though. There are no concrete rules when drawing support and resistance zones, and you may change the bounds of a resistance zone when it becomes a support zone and vice versa. This highlights the dynamic and fluid nature of support and resistance.
Tips for Improving Your Trading Using Support and Resistance Zones
- Place your stop loss orders on the far side of zones to avoid getting stopped out, giving your trade breathing room within the identified area of support or resistance.
- Place your limit orders on the nearside of zones to avoid missing entries, increasing the likelihood of capturing favorable price movements within the zone.
- If entering a trade via market order, you can buy/sell into the zone, acknowledging that the zone represents a range of potential price action.
- For a more conservative approach, wait for a reaction out of the zone, confirming the price action before committing to a trade in this zones.
We hope you have enjoyed this brief introduction to support and resistance zones, for more tutorials like this, tips for improving your trading and regular analysis, be sure to check our education articles.
Want to trade forex? Here’s a list of forex brokers to check out plus analysis and predictions for major currencies.