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Support and Resistance

Support and Resistance is one of the universal concepts in trading.

You can apply it to day trading, swing trading, position trading, and etc.

Thus, if there’s only one thing you can master in technical analysis, it would 

be learning how to trade with Support and Resistance.

However, there are many myths surrounding it which are not true. For example:


The more times Support is tested, the stronger it becomes Support and Resistance are lines on your chart

Support and Resistance are good levels to place your stop loss

And if you follow these theories above, it would cost you money in the long run.

But don’t worry. After reading this chapter you will learn the truth about Support 

and Resistance — and never look at it the same way again.

Here’s what you’ll learn:

·         The truth about Support & Resistance (it’s not what you think)

·         Why trading near Support & Resistance gives you favorable risk to reward

·         How the market really moves Are you ready?

Then let’s get started.

Secret : The more times Support or Resistance is tested, the weaker it becomes

First, let’s define Support and Resistance.

Support is an area on your chart with potential buying pressure.

And Resistance is an area on your chart with potential selling pressure. An example:

Now:

You’ve probably read trading books that say… the more times Support or 

Resistance is tested, the stronger it becomes.

But the truth is…

The more times Support or Resistance is tested, the weaker it becomes. Here’s why…

The market reverses at Support because there is buying pressure to push the price higher.

The buying pressure could be from Institutions, banks, or smart money that trades in large orders. But imagine this:

If the market keeps re-testing Support, these orders will eventually be filled. And when all the orders are filled, who’s left to buy?

Here’s what I mean:

Pro Tip:

Higher lows into Resistance usually result in a breakout (ascending triangle). Lower highs into Support usually results in a breakdown (descending triangle). Let’s move on…

Secret: Support and Resistance are areas on your chart (and not lines)

This is a mistake I’m guilty of. Treating Support and Resistance (SR) as lines on my chart. Why?

Because you’ll face these two problems:

·         Price “undershoot” and you missed the trade

·         Price “overshoot” and you assume SR is broken Let me explain…

Price “undershoot” and you missed the trade

This occurs when the market comes close to your SR line, but not close enough.

Then, it reverses back into the opposite direction. And you miss the trade because you were waiting for the market to test your exact SR level.

An example:



Price “overshoot” and you assume SR is broken

This happens when the market breaks your SR level and you assume it’s broken. Thus, you trade the breakout… but only to realize it’s a false breakout.


So, how do you solve these two problems? Simple.

Treat Support and Resistance as areas on your chart, not lines. 

Secret: Why Support and Resistance are areas on your chart

Because of these two group of traders…

1.    Traders with the fear of missing out (FOMO)

2.    Traders who want to get the best possible price (Cheapo) Let me explain:

Traders with the fear of missing out would enter their trades the moment price touches Support. And if there’s enough buying pressure, the market would reverse at that location.

On the other hand…

There are traders who want to get the best possible price, so they place orders at the low of Support. And if enough traders do it, the market will reverse near the lows of Support.

But here’s the thing:

You’ve no idea which group of traders will be in control. Whether it’s FOMO or Cheapo traders. Thus, Support and Resistance are areas on your chart, not lines.

Make sense?

Support and Resistance can be dynamic

What you’ve learned earlier is horizontal SR (where the areas are fixed).

But it can also change over time, otherwise known as, Dynamic Support and Resistance. Now:

There are two ways to identify Dynamic SR. You can use:

1.    1.Moving average  2. Trend.  line Let me explain…

How to use moving average to identify dynamic Support and Resistance

I use the 20 & 50 MA to identify my Dynamic SR. Here’s an example:


However, it’s not the only way. You can use 100 or 200 MA, and it works fine.

Ultimately, you must find something that suits you (and not blindly follow another trader).

Trendline

These are diagonal lines on your chart to identify dynamic SR. Here’s what I mean:


Pro Tip:

Treat Support and Resistance as areas on your chart (and not lines). This applies to both horizontal and dynamic SR.

Secret: Support and Resistance are the worst places to put your stop loss

I need not be an Einstein to guess where you’ll put your stops. Below Support and above Resistance, right?

And why is this worst place to put your stops? It gets hunted, easily.


So… how do you avoid it?

Well, you can’t avoid it entirely.

But here are two things you can do…

·         Set your stop loss a distance from SR

·         Wait for candle to close beyond SR Let me explain…

Set your stop loss a distance from Support and Resistance

You can do this by using the Average True Range (ATR) indicator. Here’s how to do it in:

1.    Identify the low of Support

2.    Find the ATR value

3.    Take the low of support minus the ATR value

Don’t worry if this doesn’t make sense. I’ll cover it in detail in “How to set your stop loss” chapter

Wait for candle to close beyond Support and Resistance

Here’s how it works…

You only exit your trade if price closes below the low of support or the high of resistance. Here’s what I mean:

Wait for candle to close beyond Support and Resistance

Here’s how it works…

You only exit your trade if price closes below the low of support or the high of resistance. Here’s what I mean:


And here’s something interesting…

Do you know the “real move” usually occurs after traders get stopped out of their 

trades?

And you can take advantage of this scenario by using a trading strategy I’ll share with you later. But first…

Trading at Support or Resistance gives you favorable risk to reward

A big mistake traders make is this:

Entering trades when the market is in the middle of “nowhere”. And this makes it difficult to place a proper stop loss.

Imagine:

If you are short in the middle of the range, where is a logical place to put 

your stop loss? Above the highs of Resistance?

That’s not impossible but, it requires a large stop loss and offers poor risk to 

reward.

Now, what if you are patient and instead of “chasing” the markets, you let the 

markets come to you, how will that change?


Well, since you are trading from an area of value, you have a tighter stop loss — and this improves your risk to reward.

Remember… patience pays in trading. Stop chasing the markets and let the price come to you.

Pro Tip:

Mark out your Support and Resistance areas in advance.

Then use price alerts to notify you when the market has reached your desired 

level.

This prevents you from entering trades out of boredom and to enter trades from 

an area of value (which offers better risk to reward).

When Support is broken, it tends to act as Resistance (and vice versa)

This is quite an interesting phenomenon.

When the market breaks below Support, it tends to pullback towards this 

same area which has now become Resistance.

Or, when the market breaks above Resistance, it tends to pullback towards 

this same area which has now become Support.

You’re probably wondering: “Why is this so?” Here’s why:


There will be traders who go long at Support in anticipation of higher prices.

But when Support breaks, some of these traders will not cut their losses 

(thinking that the market will eventually go back in their favor).

Now, when the market retraces back towards their entry level, it gives them a 

chance to exit their trade at breakeven.

This incentivizes them to put in a sell order which creates selling pressure. 

And vice versa for those traders who go short at Resistance.

Also, this is common knowledge among traders who expect previous Support 

to turn Resistance, and previous Resistance to turn Support — and this 

becomes a self-fulfilling prophecy in itself.

Here’s what I mean:



The market moves from Support to Resistance and Resistance to Support

This may not make any sense to you right now, but let me explain…

The purpose of a market is to facilitate the transactions between buyers and 

sellers (at the best possible price).

And because of this, the market is a liquidity seeking “mechanism” that 

“hunts” for orders so more transactions can occur between buyers and 

sellers.

Now ask yourself… “Where on the chart will there likely be plenty of orders?”

It doesn’t take an Einstein to realize that plenty of orders will reside below 

Support, from traders who are long (and have their stops placed below 


Support), and traders who are bearish (looking to short the break of Support).

Likewise, there are plenty of orders above Resistance, from traders who are 

short (and have their stops placed above Resistance), and traders who are 

bullish (looking to long the break of Resistance).

In other words, Support and Resistance are liquidity areas in the markets — and 

it’s no wonder why you often see the price spiking through these levels.

So, what happens after the market “consumes” liquid in one area?

Well, it starts moving towards the next area of liquidity, thus you’ll often see the 

markets “bouncing” of Support and Resistance.

An example:


Summary

·         The more times Support and Resistance is tested, the weaker it becomes

·         Support and Resistance are areas on your chart (and not lines)

·         Support and Resistance can be dynamic

·         Support and Resistance are the worst places to put your stop loss

·         Trading at Support and Resistance gives you favorable risk to reward

·         When Support is broken, it tends to act as Resistance (and vice versa)

·         The market moves from Support to Resistance and Resistance to Support



In the previous lesson, you’ve discovered the truth about Support and Resistance.

Now, you’ll learn how to tell when Support and Resistance will break so you 

don’t get caught on the wrong side of the move.

Resistance tends to break in an uptrend

Here’s a fact:

For an uptrend to continue, it has to consistently break new highs. Thus, 

shorting at resistance is a low probability trade.



Support tends to break in a downtrend

Likewise:

For a downtrend to continue, it has to consistently break new lows. Thus,

 going long at support isn’t a good idea.



Support and Resistance tend to break when there’s buildup

Consider this:

Support is an area with potential buying pressure. So, the price should move up quickly, right? Now… what if price didn’t move up and instead, consolidates at Support?


What does it mean?

A sign of weakness as the bulls couldn’t push the price higher.

Perhaps there’s no buying pressure or, there’s a strong selling pressure. Either way, it doesn’t look good for the bulls and Support is likely to break. An example:


And the opposite for Resistance:


Clean VS Chop move and why it matters

One of the biggest secret to trading Support and Resistance is watching

 how the price approaches a level.

Often, newbie traders would wait for a Pinbar or Engulfing pattern at 

Support or Resistance areas. If it forms, they’ll enter the trade.

But a seasoned trader knows not all trading setups are equal — 

and he watches how the price approaches a level before 

deciding whether he’ll take the trade or not.

Let me explain…

There are generally 2 types of price action that occurs when the price approaches a level…

·         A chop move

·         A clean move Here’s what I mean… A chop move

You’re probably wondering:

“What’s a chop move?”

A chop move usually has a lack of momentum coming into a level. For example:


A chop move into Support has a series of lower highs coming into it (descending triangle).

This is a sign of strength by the sellers as they are selling at lower

 prices — and the price is likely to break down.

On the other hand…

A chop move into Resistance has a series of higher lows coming into

 it (ascending triangle).

This is a sign of strength by the buyers as they are buying at higher 

prices — and the price is likely to break out.

Moving on…

A clean move

A clean move is the opposite of a chop move. It has strong momentum

 coming into a level.

For example:

A clean move into Support can be seen by strong bearish candles approaching it.

The candles are relatively large and most traders would think Support 

will break. But more often than not, the market tends to reverse to the upside.


Why does it happen?

Because traders who are short will take profit at Support and buyers will

 get long at Support — and this creates an imbalance of buying pressure.

Also, new selling pressure is likely to lurk at swing highs or Resistance areas. Thus, you can expect a swift reversal back towards these levels.

A clean move into Resistance can be seen by strong bullish candles approaching it. The candles are relatively large and most traders would think Resistance will break. But more often than not, the market tends to reverse to the downside.


Why does it happen?

Because traders who are long will take profit at Resistance and sellers

 will get long at Resistance — and this creates an imbalance of selling pressure.

Also, new buying pressure is likely to lurk at swing lows or Support areas. Thus, you can expect a swift reversal back towards these levels.

Now that you’ve understood the difference between a chop and clean move


, how do you profit from this knowledge?

Simple.

If you want to trade breakouts, then you’ll want to see a chop move coming into a level. If you want to trade reversals, then you’ll want to see a clean move coming into a level. And I’ll discuss in more details later.


Summary

·         Support tends to break in a downtrend

·         Resistance tends to break in an uptrend

·         Support and Resistance tend to break when there’s buildup

·         A clean move into SR tends to reverse and a chop move into SR 

          tends to break