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Support and Resistance is one of the most important concepts that a trader of any type can learn to improve their [[trading]] and investing. There are very few concepts that are so powerful. In fact, many [[Trader Types | traders]] have used the concepts of Support and Resistance as their only [[trading]] strategy to pull profits out of the market on a daily basis. | |||
Resistance once broken becomes support. This means that the former supply becomes new demand. The sellers that were wrong become buyers as they attempt to exit their positions with as small a loss as possible. Support once broken becomes resistance. This means that the former demand becomes supply. The buyers that were wrong become sellers as they attempt to exit their positions with as small a loss as possible. | |||
A move to major support in an [[Trends#The_Uptrend | uptrend]], or major resistance in a [[Trends#The_Downtrend | downtrend]], is a negative event and can put the [[Trends | trend]] in question as this will represent a 100% retracement of the last move. | |||
This Wiki is part of the larger [[Price Action Analysis]] Wiki. You can access the [[Price Action Analysis]] Wiki [[Price Action Analysis | HERE]]. | |||
This Wiki is also a part of our [[Essential Forex Trading Guide]]. Be sure to check that out [[Essential_Forex_Trading_Guide | HERE]]. | |||
__TOC__ | __TOC__ | ||
=='''Support and Resistance Concepts'''== | |||
===What is Support and Resistance?=== | ===What is Support and Resistance?=== | ||
Actual support or resistance is prior lows and prior highs, a series of candlesticks like a base or consolidation and unfilled gaps between candlesticks. The only real support or resistance is price and the level of monetary commitment by traders at those prices. | Actual support or resistance is prior lows and prior highs, a series of [[Japanese_Candlesticks | candlesticks]] like a base or consolidation and unfilled gaps between [[Japanese_Candlesticks | candlesticks]]. The only real support or resistance is [[Price_Action_Analysis | price]] and the level of monetary commitment by [[Trader Types | traders]] at those prices. | ||
Support or resistance is objective, not subjective like western bar analysis tools that use things like [[trading]] bands, envelopes or Fibonacci retracements or other subjective tools that traders may [ | Support or resistance is objective, not subjective like western bar analysis tools that use things like [[trading]] bands, envelopes or Fibonacci retracements or other subjective tools that [[Trader Types | traders]] may [[Speculating | believe]] to be support or resistance. | ||
===Support and Resistance Analysis=== | ===Support and Resistance Analysis=== | ||
The first area of supply (sellers) in any timeframe is the prior candlestick’s high. The first area of demand (buyers) in any timeframe is the prior candlestick’s low. The second point of supply or demand is the prior pivot point or a cluster of candlesticks that formed a base or congestion area if there is no recognizable pivot point | The first area of supply (sellers) in any timeframe is the prior [[Japanese_Candlesticks | candlestick’s]] high. The first area of demand (buyers) in any timeframe is the prior [[Japanese_Candlesticks | candlestick’s]] low. The second point of supply or demand is the prior [[Pivots | pivot point]] or a cluster of [[Japanese_Candlesticks | candlesticks]] that formed a base or congestion area if there is no recognizable [[Pivots | pivot point]]. | ||
Support or resistance areas that have many overlapping opens and closes of | Support or resistance areas that have many overlapping opens and closes of [[Japanese_Candlesticks | candlesticks]] highs and lows create a tight area of demand or supply areas. Whereas [[Pivots | pivot points]] can leave a loose area of supply or demand that can be easily overcome by price. | ||
The price must move deeply into support or resistance (demand or supply) to be meaningful enough to neutralize the power of these areas. When prices move deeply into support or resistance it absorbs the buying or selling pressure that was built up there. This allows the market to have less supply or demand to push through on any subsequent tests of the area. | The [[Price_Action_Analysis | price]] must move deeply into support or resistance (demand or supply) to be meaningful enough to neutralize the power of these areas. When [[Price_Action_Analysis | prices]] move deeply into support or resistance it absorbs the buying or selling pressure that was built up there. This allows the market to have less supply or demand to push through on any subsequent tests of the area. | ||
All analysis of supply and demand should be done horizontally not diagonally like trend lines or moving averages. Trend lines and moving averages should only be used as an aid to help speed up your support and resistance analysis. | All analysis of supply and demand should be done horizontally not diagonally like trend lines or moving averages. Trend lines and moving averages should only be used as an aid to help speed up your support and resistance analysis. | ||
After a new move in price has broken through a supply or demand area a new area of demand or supply must be created in order to sustain that new move. Momentum moves indicate great strength or weakness, but if demand or supply does not create a new support or resistance area, there is nothing to stop a retracement in the opposite direction of the move should a retracement occur (see figure 5.1). | After a new move in [[Price_Action_Analysis | price]] has broken through a supply or demand area a new area of demand or supply must be created in order to sustain that new move. Momentum moves indicate great strength or weakness, but if demand or supply does not create a new support or resistance area, there is nothing to stop a retracement in the opposite direction of the move should a retracement occur (see figure 5.1). | ||
https://i.imgur.com/vmaEqdc.png | https://i.imgur.com/vmaEqdc.png | ||
''Figure 5.1: This graph shows new supply and demand areas being created throughout a trend.'' | ''Figure 5.1: This graph shows new supply and demand areas being created throughout a [[Trends | trend]].'' | ||
V reversals or pivots are 1 to 3 bar reversal points within trends. They are places to focus your attention but the supply and demand are not overly significant. Multiple bar reversal points are very significant areas of supply or demand. Rounding tops or square formations that create bases or consolidations within a trend will usually be much more difficult areas of supply or demand to get through on subsequent tests by price at these levels. | V reversals or [[Pivots | pivots]] are 1 to 3 bar reversal points within [[Trends | trends]]. They are places to focus your attention but the supply and demand are not overly significant. Multiple bar reversal points are very significant areas of supply or demand. Rounding tops or square formations that create bases or consolidations within a [[Trends | trend]] will usually be much more difficult areas of supply or demand to get through on subsequent tests by price at these levels. | ||
===Minor Price Support=== | ===Minor Price Support=== | ||
Minor price support exists when a new low revisits a prior high (see figure 5.2). This concept of minor price support can offer some excellent entry points on the buy side and serves as a basis for increased [[trading]] accuracy with lower [ | Minor price support exists when a new low revisits a prior high (see figure 5.2). This concept of minor price support can offer some excellent entry points on the buy side and serves as a basis for increased [[trading]] accuracy with lower [[risk]]. | ||
Minor support is a price level that lies just above the prior high in a steady uptrend. The basis for this support lies in the fact that resistance, once broken through to the upside, often becomes support. Each prior high in an uptrend is [ | Minor support is a price level that lies just above the prior high in a steady [[Trends#The_Uptrend | uptrend]]. The basis for this support lies in the fact that resistance, once broken through to the upside, often becomes support. Each prior high in an [[Trends#The_Uptrend | uptrend]] is [[Speculating | considered]] to be minor resistance. Once the stock or market breaks above its high, that high will often serve as minor support on subsequent pullbacks or dips. A ceiling once broken through to the upside becomes the floor. Old resistance becomes new support. | ||
Minor support helps to identify when pullbacks in uptrends have good odds of halting or reversing. Combining buy patterns with minor support creates higher odds of successful trades. [[Fundamental Analysis]] [[Sentiment Analysis]] can aid in greater [[trading]] accuracy. | Minor support helps to identify when pullbacks in [[Trends#The_Uptrend | uptrends]] have good odds of halting or reversing. Combining buy patterns with minor support creates higher odds of successful trades. [[Fundamental Analysis]] [[Sentiment Analysis]] can aid in greater [[trading]] accuracy. | ||
Basing or consolidating at minor support after breaking through prior resistance is a very strong indication that the prior uptrend will continue if it breaks to the upside again. | Basing or consolidating at minor support after breaking through prior resistance is a very strong indication that the prior [[Trends#The_Uptrend | uptrend]] will continue if it breaks to the upside again. | ||
https://i.imgur.com/z4iAAOu.png | https://i.imgur.com/z4iAAOu.png | ||
''Figure 5.2: Uptrend, old resistance becomes new support.'' | ''Figure 5.2: [[Trends#The_Uptrend | Uptrend]], old resistance becomes new support.'' | ||
===Minor Price Resistance=== | ===Minor Price Resistance=== | ||
Minor price resistance exists when a high revisits a prior low (see figure 5.3). This concept of minor price resistance can offer some excellent entry points on the selling short side and serves as a basis for increased [[trading]] accuracy and lower [ | Minor price resistance exists when a high revisits a prior low (see figure 5.3). This concept of minor price resistance can offer some excellent entry points on the selling short side and serves as a basis for increased [[trading]] accuracy and lower [[risk]]. | ||
Minor resistance is a price level that lies just below the prior low in a steady downtrend. The basis for this resistance lies in the fact that support, once broken through to the downside, often becomes resistance. Each prior low in a downtrend is [ | Minor resistance is a price level that lies just below the prior low in a steady [[Trends#The_Downtrend | downtrend]]. The basis for this resistance lies in the fact that support, once broken through to the downside, often becomes resistance. Each prior low in a [Trends#The_Downtrend | downtrend]] is [[Speculating | considered]] to be minor support. Once the stock or market breaks below its low, that low will often serve as minor resistance on subsequent rallies. A floor once broken through to the downside becomes the ceiling. Old support becomes new resistance. | ||
Minor resistance helps to identify when rallies in downtrends have good odds of halting or reversing. Combining sell patterns with minor resistance creates higher odds of successful trades. [[Fundamental Analysis]] [[Sentiment Analysis]] can aid in greater [[trading]] accuracy. | Minor resistance helps to identify when rallies in [Trends#The_Downtrend | downtrends]] have good odds of halting or reversing. Combining sell patterns with minor resistance creates higher odds of successful trades. [[Fundamental Analysis]] [[Sentiment Analysis]] can aid in greater [[trading]] accuracy. | ||
Basing or consolidating at minor resistance after breaking through prior support is a very strong indication that the prior downtrend will continue if it breaks lower to the downside. | Basing or consolidating at minor resistance after breaking through prior support is a very strong indication that the prior [Trends#The_Downtrend | downtrend]] will continue if it breaks lower to the downside. | ||
https://i.imgur.com/x08CqCL.png | https://i.imgur.com/x08CqCL.png | ||
''Figure 5.3: Downtrend, old support becomes new resistance.'' | ''Figure 5.3: [Trends#The_Downtrend | Downtrend]], old support becomes new resistance.'' | ||
===Introduction to Major Support and Major Resistance=== | ===Introduction to Major Support and Major Resistance=== | ||
Major support or major resistance signifies that a stock or market is [[trading]] in stage 1 or stage 3. A trader who has mastered buy and sell patterns in these stages will be able to make profits when the rest of the market participants are losing money and getting chopped up in these | Major support or major resistance signifies that a stock or market is [[trading]] in stage 1 or stage 3. A trader who has mastered buy and sell patterns in these stages will be able to make profits when the rest of the market participants are losing money and getting chopped up in these [[Breakouts_and_Breakdowns#The_Sideways_Time_Correction | sideways trading ranges]]. You know you are a true [[Institutional_and_Retail_Traders#What_is_an_Institutional_Trader? | professional]] when you can make money in sideways markets where making money can be difficult. | ||
Because the market spends a large portion of its time trapped in neutral | Because the market spends a large portion of its time trapped in neutral [[Breakouts_and_Breakdowns#The_Sideways_Time_Correction | sideways trading]] patterns, it’s essential that [[Trader Types | traders]] know how to handle these [[Breakouts_and_Breakdowns#The_Sideways_Time_Correction | sideways trading]] ranges by using the concepts of major price support and major price resistance. | ||
Major price support or resistance is never a single price point. It’s an area or zone, rather than an exact number, from where a rally or decline may begin or end. | Major price support or resistance is never a single price point. It’s an area or zone, rather than an exact number, from where a rally or decline may begin or end. | ||
Traders that had a profitable [[trading]] experience at the prior support or resistance area like to repeat their profitable actions if and when the price comes back to that area. There is a certain degree of memory held in support and resistance areas and this can sometimes help to create other major support or resistance areas. | [[Trader Types | Traders]] that had a profitable [[trading]] experience at the prior support or resistance area like to repeat their profitable actions if and when the [[Price_Action_Analysis | price]] comes back to that area. There is a certain degree of memory held in support and resistance areas and this can sometimes help to create other major support or resistance areas. | ||
Traders are full of expectations and the failure to exceed a prior support or resistance level will force them to change their expectations when they start losing money on their positions. These traders, therefore, exit their positions and add confirmation to the support or resistance areas with their liquidation orders. This is where great traders identify money-making opportunities and exploit them with the concepts of major support and major resistance. | [[Trader Types | Traders]] are full of expectations and the failure to exceed a prior support or resistance level will force them to change their expectations when they start losing money on their positions. These [[Trader Types | traders]], therefore, exit their positions and add confirmation to the support or resistance areas with their liquidation orders. This is where great [[Trader Types | traders]] identify money-making opportunities and exploit them with the concepts of major support and major resistance. | ||
Major support or resistance areas are sideways trends and all sideways trends will eventually breakout or breakdown. | Major support or resistance areas are [[Breakouts_and_Breakdowns#The_Sideways_Time_Correction | sideways trends]] and all [[Breakouts_and_Breakdowns#The_Sideways_Time_Correction | sideways trends]] will eventually [[Breakouts_and_Breakdowns#The_Breakout | breakout]] or [[Breakouts_and_Breakdowns#The_Breakdown | breakdown]]. | ||
| Line 81: | Line 92: | ||
Major support can be defined as the current low revisiting a prior low. It can also be viewed as a double bottom (see figure 5.4). | Major support can be defined as the current low revisiting a prior low. It can also be viewed as a double bottom (see figure 5.4). | ||
Major price support is a price level or area at which the demand for a stock or market overwhelms the existing supply available. It is an area at which the buying begins to overwhelm the selling, the market turns from bearish to bullish. | Major price support is a [[Price_Action_Analysis | price]] level or area at which the demand for a stock or market overwhelms the existing supply available. It is an area at which the buying begins to overwhelm the selling, the market turns from bearish to bullish. | ||
Every low, from which a strong rally ensued, has contained within it a certain degree of positive memory. This is what can create something close to a self-fulfilling prophecy and makes for high odds of success buy scenario. | Every low, from which a strong rally ensued, has contained within it a certain degree of positive memory. This is what can create something close to a self-fulfilling prophecy and makes for high odds of success buy scenario. | ||
Traders who went short at the prior low expecting prices to breakdown and held on to their positions when the rally started are in pain and as soon as they get the chance to relieve themselves of their short position with a small loss or breakeven, they will do so. This will create demand at the prior low as traders want to get out of their short trades. Conversely, traders who bought and made a profit at the prior low will try to repeat their profitable actions at the low again. This adds more fuel to the rally. This is especially true if there was a lot of volume at the prior low as many traders are likely to be caught in a bad short position there. | [[Trader Types | Traders]] who went short at the prior low expecting [[Price_Action_Analysis | prices]] to [[Breakouts_and_Breakdowns#The_Breakdown | breakdown]] and held on to their positions when the rally started are in pain and as soon as they get the chance to relieve themselves of their short position with a small loss or breakeven, they will do so. This will create demand at the prior low as [[Trader Types | traders]] want to get out of their short trades. Conversely, [[Trader Types | traders]] who bought and made a profit at the prior low will try to repeat their profitable actions at the low again. This adds more fuel to the rally. This is especially true if there was a lot of volume at the prior low as many [[Trader Types | traders]] are likely to be caught in a bad short position there. | ||
https://i.imgur.com/R356BK1.png | https://i.imgur.com/R356BK1.png | ||
| Line 96: | Line 107: | ||
Major price resistance can be defined as the current high revisiting a prior high. It can also be viewed as a double top (see figure 5.5). | Major price resistance can be defined as the current high revisiting a prior high. It can also be viewed as a double top (see figure 5.5). | ||
Major Price Resistance is a price level or area where the supply for a stock or market overwhelms the existing demand. It is an area where buying begins to overwhelm the selling and the market turns from bullish to bearish. | Major Price Resistance is a [[Price_Action_Analysis | price]] level or area where the supply for a stock or market overwhelms the existing demand. It is an area where buying begins to overwhelm the selling and the market turns from bullish to bearish. | ||
Every high from which a strong decline ensued has contained within it a certain degree of negative memory. This is what can create somewhat of a self-fulfilling prophecy and creates a high odds short trade scenario for traders who know how to take advantage of it. | Every high from which a strong decline ensued has contained within it a certain degree of negative memory. This is what can create somewhat of a self-fulfilling prophecy and creates a high odds short trade scenario for [[Trader Types | traders]] who know how to take advantage of it. | ||
Traders who went long at or near the prior high anticipating a breakout and held their positions when the decline started are in pain and as soon as they get a chance to relieve themselves of their positions with a small loss, they will do this as soon as the price gets close to where they bought. This will create overhanging supply at the prior high. Conversely, traders who shorted at the high and made a profit will try to repeat their profitable actions at that high again. This adds more fuel to the decline. This is especially true if there was a lot of volume at the prior high as many traders are likely to still be long there and want to get out. | [[Trader Types | Traders]] who went long at or near the prior high anticipating a [[Breakouts_and_Breakdowns#The_Breakout | breakout]] and held their positions when the decline started are in pain and as soon as they get a chance to relieve themselves of their positions with a small loss, they will do this as soon as the [[Price_Action_Analysis | price]] gets close to where they bought. This will create overhanging supply at the prior high. Conversely, [[Trader Types | traders]] who shorted at the high and made a profit will try to repeat their profitable actions at that high again. This adds more fuel to the decline. This is especially true if there was a lot of volume at the prior high as many [[Trader Types | traders]] are likely to still be long there and want to get out. | ||
https://i.imgur.com/ULrc6ma.png | https://i.imgur.com/ULrc6ma.png | ||
| Line 107: | Line 118: | ||
== | =='''Supply and Demand'''== | ||
The concept of [[Supply and Demand]] has an interesting use in the financial markets. When the [[Price_Action_Analysis | price]] of an asset trades at one level and that [[trading]] leads to the formation of an area of interest on future tests by [[Price_Action_Analysis | price]], then this area can be viewed as a potential [[Supply and Demand]] area depending on where it is in the context of the [[Trends | trend]]. | |||
[[Supply and Demand]] areas can be formed because of interest from [[Institutional_and_Retail_Traders#What_is_an_Institutional_Trader? | institutions]] at those levels, a previously traded area, a psychological number or even an area where many [[Trader Types | traders]] will tend to put their stop loss orders. | |||
In the Wiki on [[Supply and Demand]], we cover topics such asL | |||
* [[Supply_and_Demand#Supply_and_Demand_Guidelines | Supply and Demand Guidelines]] | |||
* [[Supply_and_Demand#Movements_of_Price_between_Supply_and_Demand | Movements of Price between Supply and Demand]] | |||
We have a separate Wiki on [[Supply and Demand]] which is important to understanding support and resistance. [[Supply_and_Demand | CLICK HERE]] to access the Wiki on [[Supply and Demand]]. | |||
=='''[[Forex Support and Resistance]]'''== | |||
[[Support and Resistance]] is a common concept used in virtually all types of financial markets for the purpose of [[Speculating | speculating]]. In this Wiki, we will explore [[Support and Resistance]] concepts as they commonly are used by [[Trader Types | traders]] in the [[Forex]] market. | |||
[[Forex Support and Resistance]] topics that we will explore include: | |||
* [[Forex_Support_and_Resistance#Rules_when_Trading_Forex_Support_and_Resistance_Levels | Rules when Trading Forex Support and Resistance Levels]] | |||
* [[Forex_Support_and_Resistance#How_to_Trade_Forex_Support_and_Resistance_Levels | How to Trade Forex Support and Resistance Levels]] | |||
* [[Forex_Support_and_Resistance#The_2_Main_Types_of_Forex_Support_and_Resistance | The 2 Main Types of Forex Support and Resistance]] | |||
* [[Forex_Support_and_Resistance#Forex_Support_and_Resistance_Categories | Forex Support and Resistance Categories]] | |||
* [[Forex_Support_and_Resistance#Previously_Traded_Price_Areas | Previously Traded Price Areas]] | |||
* [[Forex_Support_and_Resistance#Forex_Price_Based_Support_and_Resistance | Forex Price Based Support and Resistance]] | |||
* [[Forex_Support_and_Resistance#Double_Zero_Price_Levels | Double Zero Price Levels]] | |||
* [[Forex_Support_and_Resistance#Trader_Pivot_Points | Trader Pivot Points]] | |||
* [[Forex_Support_and_Resistance#Fibonacci_Retracements | Fibonacci Retracements]] | |||
You can access the main Wiki on [[Forex Support and Resistance]] [[Forex Support and Resistance | HERE]]. | |||
==Related Wikis== | |||
Readers of '''Support and Resistance''' also viewed: | |||
* [[Technical Analysis]] | |||
* [[Technical Trading Strategies]] | |||
* [[Risk Management]] | |||
* [[Having an Edge in your Trading]] | |||
* [[Essential Forex Trading Guide]] | |||
Latest revision as of 15:49, 2 November 2023
Support and Resistance is one of the most important concepts that a trader of any type can learn to improve their trading and investing. There are very few concepts that are so powerful. In fact, many traders have used the concepts of Support and Resistance as their only trading strategy to pull profits out of the market on a daily basis.
Resistance once broken becomes support. This means that the former supply becomes new demand. The sellers that were wrong become buyers as they attempt to exit their positions with as small a loss as possible. Support once broken becomes resistance. This means that the former demand becomes supply. The buyers that were wrong become sellers as they attempt to exit their positions with as small a loss as possible.
A move to major support in an uptrend, or major resistance in a downtrend, is a negative event and can put the trend in question as this will represent a 100% retracement of the last move.
This Wiki is part of the larger Price Action Analysis Wiki. You can access the Price Action Analysis Wiki HERE.
This Wiki is also a part of our Essential Forex Trading Guide. Be sure to check that out HERE.
Support and Resistance Concepts
What is Support and Resistance?
Actual support or resistance is prior lows and prior highs, a series of candlesticks like a base or consolidation and unfilled gaps between candlesticks. The only real support or resistance is price and the level of monetary commitment by traders at those prices.
Support or resistance is objective, not subjective like western bar analysis tools that use things like trading bands, envelopes or Fibonacci retracements or other subjective tools that traders may believe to be support or resistance.
Support and Resistance Analysis
The first area of supply (sellers) in any timeframe is the prior candlestick’s high. The first area of demand (buyers) in any timeframe is the prior candlestick’s low. The second point of supply or demand is the prior pivot point or a cluster of candlesticks that formed a base or congestion area if there is no recognizable pivot point.
Support or resistance areas that have many overlapping opens and closes of candlesticks highs and lows create a tight area of demand or supply areas. Whereas pivot points can leave a loose area of supply or demand that can be easily overcome by price.
The price must move deeply into support or resistance (demand or supply) to be meaningful enough to neutralize the power of these areas. When prices move deeply into support or resistance it absorbs the buying or selling pressure that was built up there. This allows the market to have less supply or demand to push through on any subsequent tests of the area.
All analysis of supply and demand should be done horizontally not diagonally like trend lines or moving averages. Trend lines and moving averages should only be used as an aid to help speed up your support and resistance analysis.
After a new move in price has broken through a supply or demand area a new area of demand or supply must be created in order to sustain that new move. Momentum moves indicate great strength or weakness, but if demand or supply does not create a new support or resistance area, there is nothing to stop a retracement in the opposite direction of the move should a retracement occur (see figure 5.1).
Figure 5.1: This graph shows new supply and demand areas being created throughout a trend.
V reversals or pivots are 1 to 3 bar reversal points within trends. They are places to focus your attention but the supply and demand are not overly significant. Multiple bar reversal points are very significant areas of supply or demand. Rounding tops or square formations that create bases or consolidations within a trend will usually be much more difficult areas of supply or demand to get through on subsequent tests by price at these levels.
Minor Price Support
Minor price support exists when a new low revisits a prior high (see figure 5.2). This concept of minor price support can offer some excellent entry points on the buy side and serves as a basis for increased trading accuracy with lower risk.
Minor support is a price level that lies just above the prior high in a steady uptrend. The basis for this support lies in the fact that resistance, once broken through to the upside, often becomes support. Each prior high in an uptrend is considered to be minor resistance. Once the stock or market breaks above its high, that high will often serve as minor support on subsequent pullbacks or dips. A ceiling once broken through to the upside becomes the floor. Old resistance becomes new support.
Minor support helps to identify when pullbacks in uptrends have good odds of halting or reversing. Combining buy patterns with minor support creates higher odds of successful trades. Fundamental Analysis Sentiment Analysis can aid in greater trading accuracy.
Basing or consolidating at minor support after breaking through prior resistance is a very strong indication that the prior uptrend will continue if it breaks to the upside again.
Figure 5.2: Uptrend, old resistance becomes new support.
Minor Price Resistance
Minor price resistance exists when a high revisits a prior low (see figure 5.3). This concept of minor price resistance can offer some excellent entry points on the selling short side and serves as a basis for increased trading accuracy and lower risk.
Minor resistance is a price level that lies just below the prior low in a steady downtrend. The basis for this resistance lies in the fact that support, once broken through to the downside, often becomes resistance. Each prior low in a [Trends#The_Downtrend | downtrend]] is considered to be minor support. Once the stock or market breaks below its low, that low will often serve as minor resistance on subsequent rallies. A floor once broken through to the downside becomes the ceiling. Old support becomes new resistance.
Minor resistance helps to identify when rallies in [Trends#The_Downtrend | downtrends]] have good odds of halting or reversing. Combining sell patterns with minor resistance creates higher odds of successful trades. Fundamental Analysis Sentiment Analysis can aid in greater trading accuracy.
Basing or consolidating at minor resistance after breaking through prior support is a very strong indication that the prior [Trends#The_Downtrend | downtrend]] will continue if it breaks lower to the downside.
Figure 5.3: [Trends#The_Downtrend | Downtrend]], old support becomes new resistance.
Introduction to Major Support and Major Resistance
Major support or major resistance signifies that a stock or market is trading in stage 1 or stage 3. A trader who has mastered buy and sell patterns in these stages will be able to make profits when the rest of the market participants are losing money and getting chopped up in these sideways trading ranges. You know you are a true professional when you can make money in sideways markets where making money can be difficult.
Because the market spends a large portion of its time trapped in neutral sideways trading patterns, it’s essential that traders know how to handle these sideways trading ranges by using the concepts of major price support and major price resistance.
Major price support or resistance is never a single price point. It’s an area or zone, rather than an exact number, from where a rally or decline may begin or end.
Traders that had a profitable trading experience at the prior support or resistance area like to repeat their profitable actions if and when the price comes back to that area. There is a certain degree of memory held in support and resistance areas and this can sometimes help to create other major support or resistance areas.
Traders are full of expectations and the failure to exceed a prior support or resistance level will force them to change their expectations when they start losing money on their positions. These traders, therefore, exit their positions and add confirmation to the support or resistance areas with their liquidation orders. This is where great traders identify money-making opportunities and exploit them with the concepts of major support and major resistance.
Major support or resistance areas are sideways trends and all sideways trends will eventually breakout or breakdown.
Major Price Support
Major support can be defined as the current low revisiting a prior low. It can also be viewed as a double bottom (see figure 5.4).
Major price support is a price level or area at which the demand for a stock or market overwhelms the existing supply available. It is an area at which the buying begins to overwhelm the selling, the market turns from bearish to bullish.
Every low, from which a strong rally ensued, has contained within it a certain degree of positive memory. This is what can create something close to a self-fulfilling prophecy and makes for high odds of success buy scenario.
Traders who went short at the prior low expecting prices to breakdown and held on to their positions when the rally started are in pain and as soon as they get the chance to relieve themselves of their short position with a small loss or breakeven, they will do so. This will create demand at the prior low as traders want to get out of their short trades. Conversely, traders who bought and made a profit at the prior low will try to repeat their profitable actions at the low again. This adds more fuel to the rally. This is especially true if there was a lot of volume at the prior low as many traders are likely to be caught in a bad short position there.
Figure 5.4: Major support area.
Major Price Resistance
Major price resistance can be defined as the current high revisiting a prior high. It can also be viewed as a double top (see figure 5.5).
Major Price Resistance is a price level or area where the supply for a stock or market overwhelms the existing demand. It is an area where buying begins to overwhelm the selling and the market turns from bullish to bearish.
Every high from which a strong decline ensued has contained within it a certain degree of negative memory. This is what can create somewhat of a self-fulfilling prophecy and creates a high odds short trade scenario for traders who know how to take advantage of it.
Traders who went long at or near the prior high anticipating a breakout and held their positions when the decline started are in pain and as soon as they get a chance to relieve themselves of their positions with a small loss, they will do this as soon as the price gets close to where they bought. This will create overhanging supply at the prior high. Conversely, traders who shorted at the high and made a profit will try to repeat their profitable actions at that high again. This adds more fuel to the decline. This is especially true if there was a lot of volume at the prior high as many traders are likely to still be long there and want to get out.
Figure 5.5: Major resistance area
Supply and Demand
The concept of Supply and Demand has an interesting use in the financial markets. When the price of an asset trades at one level and that trading leads to the formation of an area of interest on future tests by price, then this area can be viewed as a potential Supply and Demand area depending on where it is in the context of the trend.
Supply and Demand areas can be formed because of interest from institutions at those levels, a previously traded area, a psychological number or even an area where many traders will tend to put their stop loss orders.
In the Wiki on Supply and Demand, we cover topics such asL
We have a separate Wiki on Supply and Demand which is important to understanding support and resistance. CLICK HERE to access the Wiki on Supply and Demand.
Forex Support and Resistance
Support and Resistance is a common concept used in virtually all types of financial markets for the purpose of speculating. In this Wiki, we will explore Support and Resistance concepts as they commonly are used by traders in the Forex market.
Forex Support and Resistance topics that we will explore include:
- Rules when Trading Forex Support and Resistance Levels
- How to Trade Forex Support and Resistance Levels
- The 2 Main Types of Forex Support and Resistance
- Forex Support and Resistance Categories
- Previously Traded Price Areas
- Forex Price Based Support and Resistance
- Double Zero Price Levels
- Trader Pivot Points
- Fibonacci Retracements
You can access the main Wiki on Forex Support and Resistance HERE.
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