When Traders find that their results
aren’t measuring up to their expectations, sometimes the answer can be found by
going back to the basics. Two terms that Stock Traders and Forex Traders
should never lose track of is ‘support’ and ‘resistance’.
It’s so tempting to look at a chart
of share price and see the potential in how far a trend might go and how
much profit the Trader might make. However, a quick look at support and
resistance might shed new light on the subject. In this post I’m going to
differentiate strong resistance from moderate resistance and strong support
from moderate support. You may have never heard of support and resistance in
terms of moderate or strong. So this information may be helpful to you.
Support
With an upward-trending share price
action, as shown in the figure below, we look for support under the price
action. Notice two important factors:
1. The
price action bounced off the support lines at least five times.
2. The
price action lasted for almost three years (the space between each vertical
line is 3 months).
Strong support will exhibit more
than 3 bounces off the support line and last for a period of 3 or more
weeks. Without a doubt, the price action above demonstrates strong
support.
Moderate support is represented by 3
touches of the resistance line over a period of 2 to 3 weeks. If it’s less than
3 touches, or less than 2 weeks, I wouldn’t call it a valid support. However,
this is my preference. As a Trader you must use your own judgment as to whether
it’s support or not.
Caution: Some Traders insist that
the price touch the line, not fall short, and not go beyond. Don’t be too picky
about this. If it’s close, we’ll call it a touch. Also note, each candle that
touches the support line is considered a touch.
Resistance
With an down-trending price action,
as shown in the figure below, we look for resistance above the price
action. Notice two important factors:
1. The
price action bounced off the resistance line at least five times.
2. The
price action lasted for almost two years (the space between each vertical line
is 3 months).
Strong resistance will exhibit more
than 3 bounces off the resistance line over a period of 3 or more weeks.
Without a doubt, the price action above demonstrates strong resistance.
Moderate resistance is represented
by 3 touches of the resistance line over a period of 2 to 3 weeks. If it’s less
than 3 touches, or less than 2 weeks, I would hesitate in calling it
a valid resistance. However, this is my preference. As a Trader you must use your
own judgment as to whether it’s resistance or not.
Caution: Some Traders insist that
the price touch the line, not fall short, and not go beyond. Don’t be too picky
about this. If it’s close, we’ll call it a touch. Also note, each candle
that touches the resistance line is considered a touch.
Why Is the Strength Important?
The strength of the support and
resistance is important because the stronger the support, or the stronger the
resistance, the more you as the Trader can trust it when setting your stop loss
and take profit levels in your trade.
When Resistance Becomes Support
When price action makes a legitimate
and sustained move above resistance, the resistance line becomes the
new support line. Likewise, when price action makes a legitimate and sustained
move below support, the support line becomes the new resistance line.
I made reference above to a
‘legitimate and sustained move’. Often the price action will move above
resistance, or below support, but the move is very temporary and will correct
itself within 2 or 3 candles. So be aware that the move above resistance or below
support could be a ‘false breakout’.
For more information on these
topics, click on support
or click on resistance.
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