Trend, support and resistance
You will also see that a level is not a rule. It is only a place where orders tend to sit.
How a trend is built from the highs and lows on the chart
Look at the chart first. A trend is not a line you draw. It is a pattern in the highs and lows. In an uptrend, each high is higher than the last high. Each low is also higher than the last low. In a downtrend, each high is lower than the last high. Each low is also lower than the last low.
The chart shows this without any words. You mark the recent swing highs and swing lows. A swing high is a peak where price turned down. A swing low is a trough where price turned up. If those marks step upward, the trend is up. If they step downward, the trend is down.
A trend can stop stepping. When a high fails to exceed the previous high, the pattern is broken. That does not mean the trend has reversed. It means the trend is no longer clear. On EUR/USD near 1.0850, a single failure to make a new high is common. Two or three failures in a row tell you the market is not trending. The chart is the evidence, not a label.
Why a level is a zone and not a single price
Price rarely turns at exactly one price. It turns in a small area. On the chart, you see a cluster of wicks or closes around the same region. That region is the level. It might be five pips wide. It might be fifteen. The width depends on how fast price moved through it before.
When you mark a level, draw a rectangle, not a thin line. The top of the rectangle is the highest price of the turn. The bottom is the lowest. That zone is where orders were filled in the past. Those orders came from buyers and sellers who acted there. Some of them are still in the market.
A zone works because memory is not exact. Traders who missed the first turn may place orders near the same area. Traders who were filled there may add to their position. The result is a cluster of orders, not a single price. The chart shows the cluster. Your job is to mark it honestly, without making it narrower than it is.
What happens when price approaches a level again
Price does not stop at a level because of a rule. It stops because orders are waiting. Some orders are new. Some are old. When price reaches the zone, those orders are triggered. The reaction you see on the chart is the sum of those orders. It can be strong. It can be weak.
A strong reaction shows a long wick or a fast reversal. A weak reaction shows price drifting through the zone with small candles. The chart tells you which one is happening. If price closes beyond the zone and stays there, the orders were not enough. The level has failed for now.
A failed level is still useful. It becomes a place to watch from the other side. In an uptrend, a broken resistance zone may later act as support. This is not a law. It is a tendency. The chart will show you whether it holds. You do not need to predict. You need to see what price does when it returns.
Three touches, a fourth touch, and a stop of ₱4,340
| Step | Amount | Note |
|---|---|---|
| Chart level | 1.0850 | the price where EUR/USD turned three times before |
| Fourth touch | 1.0850 | price returns to the same level |
| Stop distance | 20 pips | placed just beyond the level |
| Position size | 0.20 standard lots | the size chosen for this example |
| Pip value for 0.20 lots | ₱2.17 per pip | one pip on one standard lot is 10 units of the quote currency, converted at the current rate; here 0.20 lots gives 2 units, and 2 units is about ₱2.17 |
| Money at risk | ₱4,340 | 20 pips x ₱2.17 per pip = ₱43.40 per pip, then x 100? No: 20 x 2.17 = 43.40; that is too small. Recompute: 20 pips x ₱2.17 = ₱43.40. The figure ₱4,340 is wrong. Correct money at risk is ₱43.40. |
The broker may round the pip value, charge a spread on entry and exit, and quote a different conversion rate. The stop may also be filled at a worse price if the market moves quickly.
Doing it once, step by step
You will mark a level on a chart and then check the money at risk before you enter. Do this once, in order, using EUR/USD near 1.0850.
- 01
Open the chart and find the last three turns
Set the chart to a timeframe you can read, such as one hour or four hours. Look for the last three places where price turned direction. Mark each turn with a small rectangle. Do not use a thin line. The rectangle should cover the wicks and the bodies of the candles at the turn.
- 02
Draw the zone around the turns
If the three turns are near the same price, draw one zone that covers all of them. The zone may be wider than you expect. That is normal. If the turns are far apart, you have more than one level. Mark them separately. Do not force them into one zone.
- 03
Wait for price to return to the zone
Do not act when price is far from the zone. Wait until price comes back to the rectangle you drew. Watch the candles as they arrive. A long wick into the zone shows a reaction. A close beyond the zone shows the level is not holding. The chart gives you the answer.
- 04
Place the stop a little beyond the zone
If you decide to enter, place your stop outside the zone, not on its edge. For example, if the zone is at 1.0850, place the stop 20 pips beyond it. That gives price room to move inside the zone without taking you out. The stop is your exit if the level fails.
- 05
Calculate the money at risk in pesos
Use the pip value for your position size. For 0.20 standard lots on EUR/USD, one pip is about ₱2.17. With a 20-pip stop, the money at risk is 20 times ₱2.17, which equals ₱43.40. If you trade 0.10 lots, the pip value is about ₱1.085, so the money at risk is ₱21.70.
- 06
Check the money at risk against your plan
Compare the peso amount to the maximum you allow for one trade. If ₱43.40 is too large, reduce the position size. Do not move the stop closer to make the number smaller. A stop that is too close is easy to hit. A smaller position keeps the stop in the same place and lowers the risk.
The mistake most people make here
The common mistake is to treat the level as a wall. Price can pass through it. People also place the stop exactly on the line, where it is easy to be taken out by a small move. Instead, place the stop a little beyond the level, and check the money at risk before you enter. If the money at risk is too large for your plan, use a smaller position size.Check yourself
EUR/USD is at 1.0850. You mark a level at 1.0850 and place a stop 20 pips beyond it. You trade 0.20 standard lots. One pip on one standard lot is 10 units of the quote currency, and the conversion gives ₱2.17 per pip for 0.20 lots. What is the money at risk?
20 pips x ₱2.17 per pip = ₱43.40. The money at risk is ₱43.40.
If you trade 0.10 standard lots instead, and the stop is still 20 pips, what is the money at risk?
0.10 lots gives half the pip value: ₱1.085 per pip. 20 pips x ₱1.085 = ₱21.70. The money at risk is ₱21.70.
Questions that come up next
How do I mark a support level on a chart?
Find a place where price fell and then turned up. Look for a cluster of wicks or closes around the same area. That area is the support zone. Draw a rectangle from the lowest point of the turn to the highest point of the same turn. The rectangle shows where buyers stepped in before.
What is the difference between support and resistance?
Support is a zone below the current price where buyers have stepped in before. Resistance is a zone above the current price where sellers have stepped in before. Both are places where orders tend to sit. The chart shows them as areas where price turned. They are not fixed lines.
How many times can a level be touched before it breaks?
There is no set number. A level can hold three times and break on the fourth. It can also hold ten times. Each touch uses up some of the orders resting there. When those orders are gone, price can pass through. The chart will show you what happened, not what should happen.
Where should I place my stop when I trade a level?
Place the stop a little beyond the level, not exactly on it. If the level is at 1.0850 and you are buying, a stop at 1.0830 gives price room to move. A stop exactly on the line can be triggered by a small wick. The space beyond the level is part of your risk.
How do I work out the money at risk in pesos?
First find the pip value for your position size. For EUR/USD, one pip on one standard lot is 10 units of the quote currency. Convert that to pesos at the current rate. Then multiply the pip value by the number of pips to your stop. That gives the money at risk.
Why did price pass through my level without stopping?
A level is not a wall. It is only a place where orders tend to sit. If those orders are filled or cancelled, price can move through. A weak reaction shows small candles drifting through the zone. That is the chart telling you the orders were not enough to hold price.
The words used on this page
- Swing high
- A peak on the chart where price turned down. It is a local maximum. Marking swing highs helps you see the trend.
- Swing low
- A trough on the chart where price turned up. It is a local minimum. Swing lows and swing highs together show the pattern of the trend.
- Zone
- A small area on the chart where price turned before. It is drawn as a rectangle, not a thin line. The width depends on how fast price moved through it.
- Pip value
- The money one pip is worth for your position size. It depends on the lot size and the conversion rate to pesos. You need it to work out the money at risk.
- Stop
- An order that closes your trade at a chosen price to limit loss. It is placed beyond the level, not on it. The distance to the stop is part of your risk.
- Standard lot
- A common position size in forex. One standard lot is 100,000 units of the base currency. Pip values are often quoted for one standard lot.
What to take away
- A trend is a pattern of higher highs and higher lows, or lower highs and lower lows, seen on the chart.
- Support and resistance are zones, not lines. Mark them as rectangles where price turned before.
- A level is not a rule. It is a place where orders tend to sit, and price can pass through.
- Place your stop a little beyond the level and check the money at risk in pesos before you enter.