Analysis Toolbox – Support and Resistance

This article in The Trader’s Indicator Series discusses Support and Resistance, and how it factors into price behavior during trends and sideways consolidations, an integral component of the trader’s toolbox and crucial for manual trading. The previous article discussed end-of-trend market reversals, focusing on the 123 reversal pattern, a break-out pattern. Support and resistance can be used either as a break-out or a fading technique, depending on how many times the market tests a particular area and whether or not price is ready to find a new trading range.

In the last series, called The Trader’s Pendulum, we took you through the 10 Habits, all aimed to support a successful trader. Your mission in developing these habits is to get out of the Technical Trader’s Trap and transform into an Entrepreneurial Trader so that you can start being accountable to your trading. We invited you to take action and begin your journey by completing the Trader’s Scorecard (www.fxtradersedge.com/scorecard) and to get down to business by arranging a free coaching session. In this Indicator Series, we talk about the mechanics of trading.

Support and Resistance

Support and Resistance are horizontal lines drawn on a chart to show price levels achieved in the past that are now containing the current price. We label these price levels R1, R2 and R3 for resistance, and S1, S2 and S3 for support. Resistance is defined as the price level where supply is greater than demand so that sellers step in to resist the upward rise in prices. At support, demand is greater than supply, and the buyers step in to support the price from going lower.

Support and resistance can be major or minor – major if a large trend move has already occurred during the trading day and the market needs a breather to recoup some of the losses or gains during the day, and so it reverses; minor if price fluctuates around an area of support and resistance, and finally breaks through to find the next area of support or resistance. Since price action is based on market psychology, there are lots of nuances that one can experience in the markets to intuitively know if price is going to stall or continue with the trend. Support and Resistance is one tool to use, especially since most traders use it to identify market pauses and reversals. The figure above illustrates how to manually draw support and resistance on the charts.

Support and Resistance can also be plotted on larger time frames such as the Monthly or Weekly Charts. It can also be kept on the charts when one cycles through the lower time frames. For position and swing traders, these longer term areas provide a very solid approximation for a market turning point. For day traders, these longer term levels might appear to “stop the market in its tracks” the first time these levels are hit during the trading day. The message is to pay attention to these levels by keeping them on the charts.

If your mission is to become a trader or investor who stays out of the Technical Trader’s Trap, then take the leap to grow into an entrepreneurial trader.

I created the FX Trader’s EDGE Coaching Program modelled after the “10 Habits of Successful Traders”, which is the title of my newly published book by Wiley.

Excerpted with permission of the publisher John Wiley & Sons, Inc. from The Trader’s Pendulum: The 10 Habits of Highly Successful Traders.  Copyright (c) 2015 by Jody Samuels.  This book and ebook is available at all bookstores, online booksellers, and from the Wiley web site at www.wiley.com.

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