My guidelines to draw zones instead of lines for support and resistances..
As we have covered the necessary technical aspects that are required to make money out of trading financial markets. Let’s dig a bit deeper to increase the effectiveness of trading execution. I assume that the readers reading the articles about trading from here on are familiar with all the concepts that I have explained in my previous articles about trading. If you haven’t completed those, please complete them before proceeding further.
I have been saying that support and resistance levels are not straight lines, they are zones. It won’t be a problem if we consider structural support and resistance as straight lines as there will be very few trades at the structural boundaries in a given day. But there is a problem while we are dealing with the range/sideways support and resistances if you just draw them as straight lines. You can see a Lot of TST setups, BOF setups and BPB setups around the range boundaries in a given day. So, it is a bit important to clearly define the zone of the range boundaries.
The following are my guidelines to draw the zones. These are not the only rules. These are what I follow and feel free to allow some discretion in drawing them with your experience and observations.
We basically draw range support and resistance boundaries at the pivot highs or pivot lows once the sideways range is conformed (i.e when the fourth pivot is conformed). I consider the type of the candle at the pivot high/low where we are drawing the zones. So, there are three possible scenarios.
Pivot candle is a Narrow Range Bar.
Pivot candle is the one with large tails.
Pivot candle is a Wide range bar.
I have explained below how I draw the zones depending on these three variations of candles.
- Narrow Range Candles:-
The high and Low of this candle becomes the zone.
- Candles with Large tails:-
The length of the tail becomes the zone.
- Wide Range Candles:-
The zone is drawn from the high (for resistance) or low (for support) of this wide candle in such a way that there is a further retest of the zone on the right side of the chart.
I have drawn the zone in above figure in such a way that the zone satisfies our rules on the candle at the right which has retested the zone. Here, the candle on the right has a long tail, so I included the whole candle length in the zone.
I repeat, these are just guidelines. Consider the context of the sideways market and use these guidelines to draw zones so that they reject prices in the sideways trend when market touches them.