These days markets are trading at an all-time high. Like it is Nifty or Bank Nifty, they recorded their all-time high of Nifty – 23026.40 on 24 May 2024 and Bank Nifty – 49974.75 on 30 Apr 2024. When traders try to draw support resistance levels on the chart, then previous data is very important for those. But when the market is trading at an all-time high then due to the lack of a previous chart availability, it is more difficult to draw support and resistance levels on the chart.
It is very important to know how to draw support and resistance levels for options trading correctly. It is an essential skill to have in technical analysis. It is one of the most basic concepts.
Understanding what these terms mean and their practical application is important to correctly read charts (Price action) and chart reading is an essential and most important skill in a profitable options trading journey. If traders get it right trading starts to become effortless. But get it wrong then traders’ trading experience will most likely be frustrating.
Without a proper support resistance level, it is next to impossible to correct entry and exit from a trade or position.
In this blog post, we will be discussing the unique way of drawing support resistance levels using the Fibonacci tool with special settings.
With this tool, anyone can draw support and resistance levels like pro traders, These levels are respected by the market mostly at even all-time highs. You can’t get this technique in any book, YouTube, or any other knowledge source of options trading. It is my personal method and I use it on regular basis to get profits in options.
But only basis of support and resistance levels traders can’t get profits, there is a need of proper setup and chart reading also.
Fibonacci Setting
Fibonacci retracements is a tool used by traders to understand levels and possible moves may taken by the market. It is an important part of drawing support and resistance levels. The settings are as shown below pictures,
After these settings, your Fibonacci looks like this,
You may also like read – Is Bookish Knowledge Sufficient For Profitable Options Trading?
Step-by-Step Process of Draw Support and Resistance Levels
Now, we are going to see how to draw support and resistance levels step by step using the Fibonacci tool as follows,
Step 1 – Mark Day High and Day Low
The first step is to draw the day high and day low of the previous day or previous trading session. Previous day day-high and day-low strongly works as a support and resistance mostly. So you have to draw it first. The trader can use a one-day time frame for the same and after that go on a 5-minute time frame. Otherwise, they can use only a 5-minute time frame as well.
Step 2 – Calculate the Range of the Market
After drawing the day high and day low of that particular day, traders have to calculate points traveled by the market on this day on the spot chart. It is very simple. Anyone can calculate it as per the example given below,
Formula, Range = Day high – Day low.
If the day high is – 23026.40 and the day low is – 22908.00 then the range is,
Range – 23026.40 – 22908.00 = 118.40.
It will help in deciding the no of support and resistance levels in between this day high and day low.
Step 3 – Observe the chart keenly
Keen observation of the chart is most important here because, in this step, you have to decide how many lines draw in between these day high and day low. And it depends on the range covered by the market on that particular day, the swings taken by the market, and common sense.
The levels are not more than 5 lines and not less than 3 lines including day high and day low lines. More lines becoming more confusing to traders, where to buy and where to sell. If lines are less, which means more distance between these lines then target booking becomes tough.
So appropriate no of lines is most important. Above and below day high and day low you can draw levels as you want, using Fibonacci as shown above picture.
Step 4 – Actually draw lines
After deciding no of line in between day high and day low, divide the range with next number. If you want 2 (two) lines in between then divide the range with number 3 as follows,
118.40/ 3 = 39.46
This answer is the range between two lines of support and resistance. Add this answer in first level and draw a second line.
If the first level is 22908.00 then the second level is 22947.46, it is your second support or resistance.
Step 5 – Use Fibonacci to Draw the Remaining Lines
Now you have total number of lines is three (3) as, 22908.00, 22947.46, and 23026.40. Till our work is not completed. Now you can use Fibonacci on the first line which means Fibonacci’s 1 (One)st line on 22908.00 and 0.5 line on 229047.46, then your third line is on Fibonacci’s 0 (Zero)th line. It may be 22987.60. as shown in picture below,
After that, you can repeat the same process as given above to draw more lines. You found that when you place Fibonacci on the second, third, and fourth lines which means 1st line on 22947.45, the 0.5 line on 22987.60 then the third line is automatically on 23026.40. And after that placing Fibonacci on the next line you can draw more lines above and below day high and day low. As shown in the picture below,
This is the five-step unique simple method of drawing correct support and resistance levels. Trader can use this method on 5(five) minute time frame. This method is useful for any index and also particular stocks.
These support and resistance levels can help traders to take entry and exit at the right place and right time. With the combination of setups, chart reading, and support resistance levels any one can generate good profits from options trading.
Mistakes to avoid while drawing support and resistance levels
Support and resistance levels play an important role in making better trading decisions. This is an important part of technical analysis. But many times traders make mistakes in drawing support and resistance levels. Due to this, they are not able to draw these levels correctly and their analysis goes wrong, due to which they have to bear losses.
Here we will see some common mistakes and their solutions too,
- The biggest mistake traders make is to consider support and resistance levels as just a line. It is not a line but an area. The trader has to draw a line but consider it as an area. Because if they draw large areas as support and resistance levels then there will be no space left for buying and selling on the chart. Traders will get completely confused. Therefore, using the above tool, they can draw exact levels.
- The second big mistake is that after drawing the levels with different methods, traders do not fine-tune the levels according to the market. They are completely dependent on the tools, because the market keeps evolving, so the methods should also be improved accordingly. By applying common sense along with chart reading, traders can fine-tune the levels well and also they can use multiple time frame analyses to fine-tune levels.
- The third big mistake is that traders consider levels as their setup or strategy. Levels only give you an idea of where the market may turn. You always have to integrate these levels with your setup and chart reading. Only then you can get good results.
- Plotting too many support and resistance levels can clutter your chart and create confusion. Focus on identifying the most relevant and strong levels to avoid overcomplicating your analysis. Using the above-given support and resistance drawing method traders easily avoid this mistake.
- Psychological levels, often found at round numbers (like 22000, and 22500 in nifty 50), can serve as strong support or resistance levels. Ignoring these can mean missing out on important market reactions.
- It’s crucial to differentiate between strong and weak levels. A level tested multiple times and a level from where a big or one-sided move happened is stronger and more reliable. Avoid placing too much emphasis on levels that have not been tested or have shown minimal impact on price movement.
By avoiding these common mistakes, traders can enhance their ability to accurately identify support and resistance levels, leading to better trading decisions and improved market outcomes.
In conclusion, these support resistance levels provide insightful information regarding the potential pause or reversal points of market trends. You don’t need to go back five years to find support and resistance levels. The market mostly respects the latest swings and Most of the levels that you will need are going to come from highs and lows that have occurred within the last 2 to 3 days for intraday. You can travel back in time for back testing once you have the level drawn. Use this support resistance drawing method and become a better trader. All the best, Happy trading!