Pathshala: Support and Resistance

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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: large;"><b><span style="color: black; font-family: "times new roman" , "serif";">Support and Resistance</span></b></span></span></h3>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">Support and resistance is one of the most widely used concepts in trading.<br />Strangely enough, everyone seems to have their own idea on how you should measure support and resistance.</span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">Let’s take a look at the basics first.</span></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlzCkjR3D8d8PnedNR8ncUbkfPgUeYSvL48TNy6kR9i_Ww1XWDOdMmGCAiig704X_APj7-YbKnPX6E80zO9wqHZGV3cBqK3aPaA7dod0zUS8g73sZThmxE8vf8z6mYNrwJJ4yrfO5U64Y/s1600/lesson5-pic1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="285" data-original-width="525" height="173" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlzCkjR3D8d8PnedNR8ncUbkfPgUeYSvL48TNy6kR9i_Ww1XWDOdMmGCAiig704X_APj7-YbKnPX6E80zO9wqHZGV3cBqK3aPaA7dod0zUS8g73sZThmxE8vf8z6mYNrwJJ4yrfO5U64Y/s320/lesson5-pic1.png" width="320" /></a></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">Look at the diagram above.</span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">As you can see, this zigzag pattern is making its way up (bull market).<br />When the market moves up and then pulls back, the highest point reached before it pulled back is now resistance.<br />As the market continues up again, the lowest point reached before it started back is now support.</span><span style="font-size: 12.0pt;"><br />
<span style="color: black;">In this way resistance and support are continually formed as the market oscillates over time.</span><br />
<span style="color: black;">The reverse is true for the downtrend.</span></span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b><span style="color: black; font-size: 13.5pt;">Plotting Support and Resistance</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">One thing to remember is that support and resistance levels are not exact numbers.</span><span style="font-size: 12.0pt;"><br />
<span style="color: black;">Often times you will see a support or resistance level that appears broken, but soon after find out that the market was just testing it. With candlestick charts, these “tests” of support and resistance are usually represented by the candlestick shadows.</span></span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhr9J7a9vOkd9SXCpCFFTDEE8Tp_mVl2Ok2ee-pfHKKB05vbqfqzdnsbrAkhrxGg8roWh-FIxozcwDc5fLrMs-kjqpwzZ2n-5q60ESegtkRIPgNLy-xADCq7YniI1zxWsO06Owf3QSuN38/s1600/lesson5-pic2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="298" data-original-width="525" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhr9J7a9vOkd9SXCpCFFTDEE8Tp_mVl2Ok2ee-pfHKKB05vbqfqzdnsbrAkhrxGg8roWh-FIxozcwDc5fLrMs-kjqpwzZ2n-5q60ESegtkRIPgNLy-xADCq7YniI1zxWsO06Owf3QSuN38/s1600/lesson5-pic2.png" /></a></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">Notice how the shadows of the candles tested the 1.4700 support level.</span><span style="font-size: 12.0pt;"><br />
<span style="color: black;">At those times it seemed like the market was “breaking” support.</span><br />
<span style="color: black;">In hindsight we can see that the market was merely testing that level.</span></span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b><span style="color: black; font-size: 13.5pt;">So how do we truly know if support and resistance was broken?</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">There is no definite answer to this question.</span><span style="font-size: 12.0pt;"><br />
<span style="color: black;">Some argue that a support or resistance level is broken if the market can actually close past that level. However, you will find that this is not always the case.</span><br />
<span style="color: black;">Let’s take our same example from above and see what happened when the price actually closed past the 1.4700 support level.</span></span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgB-IgcD7B73W_vD9v7B2s_FuKb3NTVwqV3dYH3ftY1X74W8PVSbIMRvsYZNhyfVnZ9L2h1Hy79R-Vt5jc3A7N0SrV2sJFE3SMZCOCVtb2SmJE_w6mzpkiY5ghrq5q2T-Dxs3fdCL1keCc/s1600/lesson5-pic3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="298" data-original-width="525" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgB-IgcD7B73W_vD9v7B2s_FuKb3NTVwqV3dYH3ftY1X74W8PVSbIMRvsYZNhyfVnZ9L2h1Hy79R-Vt5jc3A7N0SrV2sJFE3SMZCOCVtb2SmJE_w6mzpkiY5ghrq5q2T-Dxs3fdCL1keCc/s1600/lesson5-pic3.png" /></a></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">In this case, price had closed below the 1.4700 support level but ended up rising back up above it.</span><span style="font-size: 12.0pt;"><br />
<span style="color: black;">If you had believed that this was a real breakout and sold this pair, you would’ve been seriously hurtin’!</span><br />
<span style="color: black;">Looking at the chart now, you can visually see and come to the conclusion that the support was not actually broken; it is still very much intact and now even stronger.</span><br />
<span style="color: black;">To help you filter out these false breakouts, you should think of support and resistance more of as “zones” rather than concrete numbers.</span><br />
<span style="color: black;">One way to help you find these zones is to plot support and resistance on a line chart rather than a candlestick chart.</span><br />
<span style="color: black;">The reason is that line charts only show you the closing price while candlesticks add the extreme highs and lows to the picture.</span><br />
<span style="color: black;">These highs and lows can be misleading because often times they are just the “knee-jerk” reactions of the market.</span><br />
<span style="color: black;">It’s like when someone is doing something really strange, but when asked about it, he or she simply replies, “Sorry, it’s just a reflex.”</span><br />
<span style="color: black;">When plotting support and resistance, you don’t want the reflexes of the market. You only want to plot its intentional movements.</span><br />
<span style="color: black;">Looking at the line chart, you want to plot your support and resistance lines around areas where you can see the price forming several peaks or valleys.</span></span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiIK3ueNsa_3Pypxy9H9etoNpkky2oFTCNAVDnr4s-0LAg5K9CjiYlSvDNkA1P9Z6ql9hi5hIW8bjRTEpTgIZhPkWAu3684lrCITjbOerCHmRxw54kf9jOpsmruXw38NSICzt5JNKujURg/s1600/lesson5-pic-4.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="298" data-original-width="525" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiIK3ueNsa_3Pypxy9H9etoNpkky2oFTCNAVDnr4s-0LAg5K9CjiYlSvDNkA1P9Z6ql9hi5hIW8bjRTEpTgIZhPkWAu3684lrCITjbOerCHmRxw54kf9jOpsmruXw38NSICzt5JNKujURg/s1600/lesson5-pic-4.png" /></a></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b><span style="color: black; font-size: 13.5pt;">Other interesting tidbits about support and resistance:</span></b></span></h3>
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<li class="MsoNormal" style="line-height: normal; mso-list: l1 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">When the price passes through resistance, that resistance could potentially become support.</span></span></li>
<li class="MsoNormal" style="line-height: normal; mso-list: l1 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">The more often price tests a level of resistance or support without breaking it, the stronger the area of resistance or support is.</span></span></li>
<li class="MsoNormal" style="line-height: normal; mso-list: l1 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">When a support or resistance level breaks, the strength of the follow-through move depends on how strongly the broken support or resistance had been holding.</span></span></li>
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<span style="font-family: Arial,Helvetica,sans-serif;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhZpSZtrDiFow2untwLYKsI-kJ2i3tcOerrCCk_TeCeaYcDHPzisyF6TA96DGYC4OvnHZiW6mRnN6AAVENTOPVXZIeDn16KWs7hRnOs5Q8mXcZj9Tk2IdODAf76KoQb0vaABebfGifRd-8/s1600/lesson5-pic-5.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="525" data-original-width="925" height="363" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhZpSZtrDiFow2untwLYKsI-kJ2i3tcOerrCCk_TeCeaYcDHPzisyF6TA96DGYC4OvnHZiW6mRnN6AAVENTOPVXZIeDn16KWs7hRnOs5Q8mXcZj9Tk2IdODAf76KoQb0vaABebfGifRd-8/s640/lesson5-pic-5.png" width="640" /></a></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">With a little practice, you’ll be able to spot potential support and resistance areas easily.</span><span style="font-size: 12.0pt;"><br />
<span style="color: black;">In the next lesson, we’ll teach you how to trade diagonal support and resistance lines, otherwise known as trend lines.</span></span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b><span style="color: black; font-size: 13.5pt;">Trading the Lines</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">Now that you know the basics, it’s time to apply these basic but extremely useful technical tools in your trading.</span><span style="font-size: 12.0pt;"><br />
<span style="color: black;">Because here at BabyPips.com we want to make things easy to understand, we have divided trading support and resistance levels into two simple ideas: the Bounce and the Break.</span></span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b><span style="color: black; font-size: 13.5pt;">The Bounce</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">As the name suggests, one method of trading support and resistance levels is right after the bounce.</span><span style="font-size: 12.0pt;"><br />
<span style="color: black;">Many retail traders make the error of setting their orders directly on support and resistance levels and then just waiting to for their trade to materialize.</span><br />
<span style="color: black;">Sure, this may work at times but this kind of trading method assumes that a support or resistance level will hold without price actually getting there yet.</span><br />
<span style="color: black;">You might be thinking, “Why don’t I just set an entry order right on the line? That way, I am assured the best possible price”.</span><br />
<span style="color: black;">When playing the bounce we want to tilt the odds in our favor and find some sort of confirmation that the support or resistance will hold.<br />Instead of simply buying or selling right off the bat, wait for it to bounce first before entering.</span><br />
<span style="color: black;">By doing this, you avoid those moments where price moves fast and break through support and resistance levels.<br />From experience, catching a falling knife can get really bloody… </span></span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjoLcSXaOyoavKrj0SuF9y0fYFYkbdFZrmHo9iNvpfwPR-aLjgFRBBzPe0E8L9rSH-bZKN8v-xF40-AbBTLHY7s_c4wcIxRcVYWBo7wLHv3iU8qapi7JTwFvLtpMfjhM9chQWEZXJ7w3s/s1600/lesson-5-pic-7.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="241" data-original-width="451" height="170" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjoLcSXaOyoavKrj0SuF9y0fYFYkbdFZrmHo9iNvpfwPR-aLjgFRBBzPe0E8L9rSH-bZKN8v-xF40-AbBTLHY7s_c4wcIxRcVYWBo7wLHv3iU8qapi7JTwFvLtpMfjhM9chQWEZXJ7w3s/s320/lesson-5-pic-7.png" width="320" /></a></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b><span style="color: black; font-size: 13.5pt;">The Break</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">In a perfect world, support and resistance levels would hold forever, McDonalds would be healthy, and we’d all have jetpacks. In a perfect trading world, we could just jump in and out whenever price hits those major support and resistance levels and earn loads of money. The fact of the matter is that these levels break… often.</span><span style="font-size: 12.0pt;"><br />
<span style="color: black;">So, it’s not enough to just play bounces.</span><br />
<span style="color: black;">You should also know what to do whenever support and resistance levels give way! There are two ways to play breaks: the aggressive way or the conservative way.</span></span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b><span style="color: black; font-size: 13.5pt;">The Aggressive Way</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">The simplest way to play breakouts is to buy or sell whenever price passes convincingly through a support or resistance zone.</span><span style="font-size: 12.0pt;"><br />
<span style="color: black;">The key word here is convincingly because we only want to enter when price passes through a significant support or resistance level with ease.</span><br />
<span style="color: black;">We want the support or resistance area to act as if it just received a Chuck Norris karate chop: We want it to wilt over in pain as price breaks right through it.</span></span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><b><span style="color: black; font-size: 13.5pt;">The Conservative Way</span></b></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">Imagine this hypothetical situation: you decided to go long EUR/USD hoping it would rise after bouncing from a support level.<br />Soon after, support breaks and you are now holding on to a losing position, with your account balance slowly falling.</span><span style="font-size: 12.0pt;"><br />
<span style="color: black;">Do you…</span></span></span></div>
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<li class="MsoNormal" style="line-height: normal; mso-list: l0 level1 lfo2; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">Accept defeat, get the heck out, and liquidate your position?</span></span></li>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">OR</span></span></div>
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<li class="MsoNormal" style="line-height: normal; mso-list: l2 level1 lfo3; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">Hold on to your trade and hope price rises up again?</span></span></li>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="color: black; font-size: 12.0pt;">If your choice is the second one, then you will easily understand this type of trading method.<br />Remember, whenever you close out a position, you take the opposite side of the trade.</span><span style="font-size: 12.0pt;"><br />
<span style="color: black;">Closing your EUR/USD long trade at or near breakeven means you will have to short the EUR/USD by the same amount.</span><br />
<span style="color: black;">Now, if enough selling and liquidation of losing positions happens at the broken support level, price will reverse and start falling again.</span><br />
<span style="color: black;">This phenomenon is the main reason why broken support levels become resistance whenever they break.</span><br />
<span style="color: black;">As you would’ve guessed, taking advantage of this phenomenon is all about being patient.</span><br />
<span style="color: black;">Instead of entering right on the break, you wait for price to make a “pullback” to the broken support or resistance level and enter after the price bounces.</span></span></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKsFjEzVIl1mox7Ov-lJI_QD_QYEw9HdJqiad0_AjJ03XVU7K7wOUkCkg7GwJh4ne_VzTWSLm3BnaHiwP6rb3J33_lOy5I2nRSNQQx_oxjX8_CCEbabfOfb6wpMXRrnHhI6SEbeJGPhns/s1600/lesson5-pic9.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="241" data-original-width="451" height="170" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKsFjEzVIl1mox7Ov-lJI_QD_QYEw9HdJqiad0_AjJ03XVU7K7wOUkCkg7GwJh4ne_VzTWSLm3BnaHiwP6rb3J33_lOy5I2nRSNQQx_oxjX8_CCEbabfOfb6wpMXRrnHhI6SEbeJGPhns/s320/lesson5-pic9.png" width="320" /></a></div>
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<b><span style="color: black; font-family: "times new roman" , "serif"; font-size: 12.0pt;">A few words of caution… </span></b><span style="color: black; font-family: "times new roman" , "serif"; font-size: x-small;">THIS DOES NOT HAPPEN ALL THE TIME.<span style="font-family: "times new roman" , "serif";"> </span>“RETESTS” OF BROKEN SUPPORT AND RESISTANCE LEVELS DO NOT HAPPEN ALL THE TIME.<span style="font-family: "times new roman" , "serif";"> </span>THERE WILL BE TIMES THAT PRICE WILL JUST MOVE IN ONE DIRECTION AND LEAVE YOU BEHIND.<span style="font-family: "times new roman" , "serif";"> </span>BECAUSE OF THIS, ALWAYS USE STOP LOSS ORDERS AND NEVER EVER HOLD ON TO A TRADE JUST BECAUSE OF HOPE.   </span></h3>
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<span style="font-family: Arial,Helvetica,sans-serif;">Support becomes resistance (and vice versa)</span></h2>
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<span style="font-family: Arial,Helvetica,sans-serif;">Another principle of technical analysis stipulates that support can 
turn into resistance and visa versa. Once the price breaks below a 
support level, the broken support level can turn into resistance. The 
break of support signals that the forces of supply have overcome the 
forces of demand. Therefore, if the price returns to this level, there 
is likely to be an increase in supply, and hence resistance.</span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;">The other turn of the coin is resistance turning into support. As the
 price advances above resistance, it signals changes in supply and 
demand. The breakout above resistance proves that the forces of demand 
have overwhelmed the forces of supply. If the price returns to this 
level, there is likely to be an increase in demand and support will be 
found.</span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;">Conclusion </span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"> 
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<span style="font-family: Arial,Helvetica,sans-serif;">Identification of key support and resistance levels is an essential 
ingredient to successful technical analysis. Even though it is sometimes
 difficult to establish exact support and resistance levels, being aware
 of their existence and location can greatly enhance analysis and 
forecasting abilities. If a security is approaching an important support
 level, it can serve as an alert to be extra vigilant in looking for 
signs of increased buying pressure and a potential reversal. If a 
security is approaching a resistance level, it can act as an alert to 
look for signs of increased selling pressure and potential reversal. If a
 support or resistance level is broken, it signals that the relationship
 between supply and demand has changed. A resistance breakout signals 
that demand (bulls) has gained the upper hand and a support break 
signals that supply (bears) has won the battle</span>.</div>
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Support and Resistance 5. Support and Resistance

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