Support and Resistance Zones
Drawing key levels differently
Support and resistance.
Ah, the cornerstone of many trading playbooks.
- Buy at support and sell at resistance for mean reversion
- Buy through resistance, and sell short through support for breakouts
Simple yet effective concepts when executed well.
But, there’s always been a problem with support and resistance.
Where do you draw the lines?
And where you draw them matters because if price is 1 pip under the line it’s perceived differently than 1 pip over.
What do I mean?
Look at this 5-minute chart of NAS.
I think we can all agree there’s resistance at 18087.
Price touched it multiple times, banging its head on the resistance ceiling.
Ok, and now let’s say we are day-trading this price action.
We’re on a 1 minute chart and we see a breakout candle forming in the last 15 minutes.
Off to the races right? Load the boat baby, this is a lay-up breakout long.
Ah – not so fast. Price whipped back and you’d have had to chalk that one up as a loss.
Damn! It looked so good.
But what if you had a different approach?
What if instead of drawing a line guessing where the resistance should be, you drew a box?
And that box was 1 ATR wide (so, on a 5 min chart here, it’s $12.)
That box represents your ZONE of resistance.
Not a precise price point, but rather a zone where sellers have stepped in many times before.
So it would look like this:
Now when price is doing its thing up near your zone, you have a natural filter.
- When it’s in the zone it’s indecision, noise, chop.
- When it’s clear of the zone that could indicate a true move developing.
It’s not perfect of course but it could be worth considering.
A rectangle 1 x ATR’s width at your key level.
It might just help you avoid getting sucked into false moves…