Most traders guess when drawing support and resistance levels. The Frequency and Proximity Method scores levels by how many times price touched them and how recent those touches are. A zone with three recent hits matters more than one with a single old touch.
But one of the things I've noticed working with other traders is that they don't often have a process to it. There's a guesswork in terms of what they do. So I have a process called the Frequency and Proximity Method. If I'm looking at a chart like this, I can see that I've got an area of resistance up here. I've got an area of support down here, and I've got a potential area of resistance here. When I'm looking at this, what I'm looking at is I'm looking at the frequency in terms of how often prices reach that level, and I'm looking at the proximity, what has happened most recently. In this scenario, I've got two high hits. Here, and I've got 3 here. So as far as I'm concerned, I would define those as key levels because at the moment I've got frequency and proximity. What has happened most recently? 2 hits high and nothing else happening there. 3 hits low, nothing else happening there. Whereas in here, not only am I a little bit more mid relative to the range, if I look at what's happening prior to this move here, what's happened most recently? I've got 1 hit. And then when I look at further back, what have I got? Price breaking that. If I'm looking at that, I'm going to evaluate those levels in differently. If I'm looking at the hits up here, the key level at the top and the key level at the bottom, I am far more likely to make a decision about trading counter-trend there or there, whereas here I'm not.
