Zones, not lines

You can mark support and resistance as zones around repeated turning points and explain why exact lines mislead.

Broken, or not?

You draw a perfect horizontal line under three lows. A few days later, the price pokes a few cents below it, and then turns up as if nothing happened. Was the line broken? Was it wrong?

Neither. The problem is the line itself. Markets do not turn at exact prices. They turn in areas, and drawing those areas correctly changes how you read every chart.

Areas, not lines

Support is a price area where declines have stopped and turned up before. Resistance is a price area where rallies have stopped and turned down. Both describe where buyers or sellers stepped in in the past.

Why should past turning points matter at all? One explanation comes from orders. Traders place limit orders, take-profit orders and stop orders at levels they consider important. Research by Carol Osler on currency orders found that such orders cluster at certain prices. When enough orders sit in one area, the price can pause or turn there. A separate study of levels published by six firms found that they helped to predict where intraday trends would be interrupted, although the effect varied.

The key word is area. In the fictional chart, four declines turned between 53.89 and 54.05, with closes between 54.20 and 54.40. A single line at 54.00 would look broken by two of the four turns. A zone from about 53.85 to 54.45 covers all of them.

How to draw a zone:

Find repeated turning points in the same price area, at least two.
Include the wicks and the nearby closes. The wicks show how far the price probed, the closes where it settled.
Keep it narrow enough to be useful. A zone that covers half the chart says nothing.
Prefer higher timeframes. Zones on daily or weekly charts tend to matter more than zones on a five-minute chart.

Zones describe the past. They can break, and a zone that has been tested many times may have used up many of the orders that held it.

Stops below the zone

Two fictional traders buy near the support area after the first turn at 53.89.

Trader A draws a line at 54.00 and places a stop just below it, at 53.95.
Trader B draws a zone from 53.85 to 54.45 and places the stop below the zone, at 53.75.

On the second turn, candle 7, the price falls to 53.91. Trader A is stopped out for a loss, a few cents below the line. Trader B's stop is not touched. Over the next days, the price rallies to 57.13.

Trader B's stop was further away, so B bought a smaller position to keep the same risk, as the position sizing lesson showed. The difference was not more risk, but a stop placed where the idea was actually proven wrong.

Common mistakes

Drawing exact lines. Wicks will pierce them and make good zones look broken.
Drawing too many zones. Mark only the clearest turning areas.
Placing stops inside the zone. Put them beyond it, where the idea fails.
Assuming a zone holds forever. Repeated tests can wear it down.

The takeaway

Support and resistance are price areas where turns happened before. Draw them as zones, not razor-thin lines.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the zone that covers all four turning points.

Tap the chart.

The lows were at 53.89, 53.91, 54.00 and 54.05. A zone from about 53.85 to 54.45 includes the wicks and the closes.
2What is support?

Support describes where buyers stepped in before. It can still break.
3Why does a zone work better than a single line?

A line at 54.00 would have been pierced by two of the four turns here, though all of them came from the same area.
4What did Carol Osler find about published support and resistance levels in currency markets?

Her study of levels from six firms found strong evidence of an effect, varying across currencies and firms.

of 4 correct.

Sources

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