Ross Maxwell - Support and Resistance

Ross Maxwell · Consulting · Intermediate

In this video Ross will break down how support and resistance. This will include a break down of what support and resistance really is, the advantages of using support and resistance over other trading styles. Ross also includes chart breakdowns and examples which are amazing as an introduction into the technical side of support and resistance. If you like Ross's teaching then please use this link to access his mentorships or further teaching - https://keyzonetraders.learnworlds.com/link/rEugyh

Transcript

So if we know where the or which side of the uh order flow is dominant or if we know where that we're in a rangeband market, we then need to know the best trade location, the best place to enter the trade from. And for that person, I use support and resistance because I believe that through support and resistance, we can actually identify where institutions are entering the market. Okay?

And I'm going to show you uh how uh I believe and why I believe that is and how we can actually look for that in the chart in this session. Okay. So we're going to identify key support and resistance zones. Now to be successful as a trader we need to follow the smart money.

Too many traders they they go right okay so we got a bullish bias want to buy and they just start buying in the market that you're not you know we don't we need even if we've got a bias we still need to exercise the patience and wait for the right trade locations to be able to give ourselves the highest probability trades the markets and their directional movements are dictated and controlled by the institutions and

institutional funds. Those are the ones who have the order flow. Those are the ones that have enough size and enough backing from them to actually move the market and move price in the market. Which is why I look to support and resistance to identify where institutional order flow is in the market. Okay.

So when I was working in London, I had access to the institutional order flow through just through my general work. You know, the institutions came to me to buy and sell in the market. Therefore, I had access to that that information by when I when I actually uh am coming to trade the markets now, I don't have access to that information.

So, I need to try and identify and I need to try and find an analytical way of being able to find out where that that that order flow comes from. And I can use support and resistance to do so. Which is why I look at uh support and resistance in terms of zones rather than horizontal fixed levels as well. And this is because, as I know, institutions do not group all of the order flow together at one level.

Okay? They don't just go, you know, I want to buy GBP dollar at 135 and have all of their and and that's where they buy. If it was that if it was that simple, you know, would be able to pick the levels out very very easily. They they cluster their order. They layer their order order flow in. Okay. But we can see where the key turning points are in the markets through support and resistance.

So once we've identified our zones, we can treat these zones as inflection points as there are only four possible outcomes at each zone. Either price is going to respect the zone and reverse it and treat it as support or resistance.

Price is going to break the zone and continue in the same direction and create a breakout. CR price will break the zone and then not respect it and go back the other way and create a false break. Or price will oscillate back price will oscillate back and forth and and will not respect the zone from either side. So quite simply, if price is below a zone, we should treat that zone as resistance.

And if it is above it, we should treat it as support. But that doesn't mean to say just because we are entering a zone of resistance, we always need to sell. And doesn't mean to say that just because we're we're entering a zone of support, we always need to buy. We need to be able to try and classify and determine the difference between each zone uh to know which ones we want to actually trade from. Okay.

So to identify a zone we need to establish where price has reacted from historically which can either be as support or resistance or both. But ideally we want to see a clear swing point and multiple reactions from a particular area.

Now strong and impulsive reactions from a particular area also suggests strong institutional participation from that zone because the stronger the reaction is from that zone the more order flow there was likely to be within that area.

And we can use sort of volume uh indicators and stuff for this especially in sort of like indices and uh and and equities um because the volume will give us that indication but generally speaking through the price action we can see when the institution stepped in through the reaction the strength of reaction from a zone.

Now key swing points that have not been tested for a while and retest of strong breakout areas are also good areas to look for because we know that there's been strong institutional participation and liquidity there historically.

And the reason that the the reason for that is because as I say the strong participation from those levels in the past means that there is liquidity still likely to be there from the institutions.

So now let's take a look at uh some examples. Okay, we've got multiple touches of resistance here. You know, really strong reaction, pulled up, strong reaction, pulled up a little bit of a a false break, but a reaction price breaks through. We then see this really strong impulsive push down before we can see multiple touches of support. Okay, we then break through it impulsively and we're balancing through here.

Okay, which means that whilst we have this as resistance and support, this now can still act as as resistance. Just because it failed the last time, we can see the majority of times that price has reacted from this entered this uh area in the market previously, market has reacted and that's because instit uh institutions have their order flow there.

When a resistance zone breaks, generally speaking, it will come support and when a support zone breaks, it can become resistance as well. Okay, so we know that there's institutional order flow in this area of the market.

Likewise on this New Zealand dollar, US dollar, we've got several touches as resistance. We've got one touch here, one touch here, impulsive breakthrough, comes back and tests as support and again it breaks pushes higher uh making higher highs, making a strong reaction from this zone.

Okay. So, that's just what we're sort of looking for in regards to being able to identify zones. Okay. Now, the size of your zone. Um, so people often ask me how to plot how how do I excuse me. Um, how do I what how do I plot these zones?

What how do I determine the width of these sort of zones? Okay. And this is what this line down here is for. This is the ATR. Okay. So um we use the average it's called the average true range and it's effectively a volatility indicator.

It tells us the average volatility in the market at that time. We want to identify the peaks in recent volatility. Make a note of that number. And then the width of your zone from the high to low should be about 50 to 60% of this value.

Now if your zones are too wide, so wider than that 50 to 60%, it suggests that the price action is quite unclean in that area and therefore you just want to avoid trading that anyway. Okay. So let's just have a look at this as an example. Okay. So we've got the same uh dollar CAD. Okay. Uh we take the ATR down here. Then now the period uh the standard setting is 14. You know, you can use anything.

It's just to try and get g it's just as this isn't like a hard and fast and set mechanical rule. We're just using it as a ga as a gauge as a bit of a guideline as an overall guideline. Okay. So using this the 14 period moving uh 14 periods average true range uh is absolutely fine as a standard settings. You then draw a line across the peaks which you can see there which sets out 13 pips.

So this excuse me so this uh from the low to the high should be so 13 divided by 2 is 6.5. So you want it sort of like six, seven, maybe eight pips wide at a push. Okay?

So somewhere six to eight pips wide from the low to the high. That is around about where the width of your zone that you want it to be. Okay? That's just as a guideline for when you're starting. If you if you plot your zone and you know you see loads of wicks up here and loads of wicks down here, then the price action isn't that that clean anyway. So you don't really want to be uh trading that area.

You're looking for clean areas of support and resistance where institutions have stepped in and reacted from that area previously. Now, not all support and resistance zones are equal. So, some are stronger than others. Stronger zones we want to look to enter trades from. These are the trade loc these are where we actually enter our trade locations.

other weaker zones where you know potentially there are uh some reactions they're a little bit weaker or maybe the price action is a little bit choppier we can use for our targets and trades management and this is because there is potential for a reaction from that zone but it's not strong enough to create a high probability entry trade location.

So we want to protect our trades when we enter those areas from any reaction. So use them as our take-profit targets, but we don't want to enter the zone, enter our trades from there because they're not high probability enough. Now, a zone broken with impulsive price action and then retested with a corrective move is more likely to hold um as support or resistance.

And if the market breaks multiple zones impulsively, it's likely that you're in a strong trend and we should avoid trading against it. And this comes back to that impulsive corrective uh moves and structures that we spoke about in another lesson. You also look for acceptance. When price holds beyond the level, it may now act in the opposite direction. So support becomes resistance or vice versa.

So now that we've established our zones and we know where we want to trade from, we need to understand how to actually trade them. Okay? So you want to set alerts for when price enters these areas and then look to your trade plans for patterns and signals to enter. And this is a really really key point that I try and get across to people. Okay?

Remember that price moves due to institutional order flow not because of a candlestick pattern. Okay? So people sitting there saying like you know uh the this candlestick pattern or series of candlesticks creates a pattern and that's the strategy. The pattern is your entry. It's not your strategy. Okay? So you know a pin bar an engulfing bar in and of itself does not create an edge.

Okay? you can get an engulfing bar in the middle of a corrective choppy price action and you're just going to lose money. Okay, so the the the true direction comes from getting the right trade location which is through your support and resistance.

Once you've identified your support and resistance and price moves into that area, you then can look for an engulfing bar or a pin bar or whatever candlestick pattern you want to look for to create your entry trigger. An engulfing bar inside your support or resistance zone is much more powerful than a random engulfing bar somewhere else on the chart. Okay, so your the pattern is your entry. It's not the strategy.

You can set limit orders with uh entry inside the zones of interest and stop the other side of the zone where it would be invalidated. That's for more advanced traders. And you can either you can e identify other minor zones that have weaker reactions and less clean price action as I said for your targets.

So let's just have a look at this. Okay, we've got this area. This is again dollar CAD. Okay, we uh this area here is not strong enough. You can see that the um we've only had one or two um one or two uh reactions and price action here is not clean. So, we're looking to enter from the clean area. Clean area of price action. Okay, so you can enter at the bottom of that zone.

You have your stop just above the zone because we know that if price gets above here, then price is invalidated. Okay, it's not likely to um be holding that zone as clean resistance. Therefore, we want to come out of the trade. But we do have this zone here which has held in the past, albeit not strongly. And therefore, we can use that as a target.

Okay? So, we wouldn't want to enter a trade here, but we can use it once we're in a trade, we can use it as a target. Okay? And this gives us a nice 2:1 risk-to-reward trade.

Um like this one here, you have a couple of touches of resistance. Price moves back correctively. You know, multiple uh this is a very corrective pull back. Uh multiple different uh candles. Not a really strong impulsive uh move down. Uh enters touches the zone. Entry is at the top of the zone.

Uh takes a bit of heat this one, but still holds the bottom of that zone before pushing off impulsively targeting that double top there. Uh and this is actually for a two and a half to one trade. Okay. So again, entry at the uh entry at the top of the zone, stop below the zone. Nice winning trade.

Peaks on the ATR are 10 pips again. So when we're looking for how wide this zone should be, draw that uh line across the top. See, it's 10 pips. Your stop wants to be five your your zone from top to bottom wants to be five to six points wide. Fairly simple stuff. Very easy to follow guidelines. Uh use it as a framework. It's not a strict strategy.

It's a framework to then go and use in your own trading. Okay. So, hopefully now you've got how to identify the uh dominant order flow in the market or whether you're in a rangebound uh market or corrective structure. Uh you now also have ways to identify where you want to be entering the market. So, you know where your bias is and which direction you want to be trading in.

But you now have ways to identify the actual areas in the market that you want to be looking to execute your trades from.