Support and Resistance
Let’s dive into Support and Resistance in this article hope you had good practice with Price Action.
Table of Contents
Support and Resistance
In order to conduct our Market Analysis.
- It’s essential to understand and be able to identify Support and Resistance (S/R).
S/R are areas on the price chart which form barriers to price movement.
Support acts as a floor, limiting further downward movement.
- Support aka Demand.
- Buy at Support aka Demand.
Resistance acts as a ceiling, limiting further upward movement.
- Resistance aka Supply.
- Sell at Resistance aka Supply.
As you can see in the below image the green dotted line drawn on opening of the candle at 9:15 am is the support.
For now don’t considered how the line is drawn or why it works etc. just try to understand the concept.
After 9:15 am when price revisits the green dotted line its unable to go down below the line.
This is called support you buy at support.
- At 12:00 pm you can see in the above image the red dotted line drawn on closing of the candle is the resistance.
- After 12:00 pm price goes down and when it revisits at 01:00 pm its unable to go up above the line.
- This is called resistance you sell at resistance.
Order-flow at S/R
- Long Position buy at Support then sell at Resistance.
- Short Position sell at Resistance then later buy at Support.
- Orders from both side are battling for dominance.
- Bulls and Bears fighting with market orders make this interesting at support and resistance.
- Support and Resistance get tested or pierced through whichever force wins.
- Remember the 4 Key points of Supply and Demand on which the market runs those are in play.
Resistance Becomes Support
- In the above image there is a resistance line from the high of a candle at 11:50 am.
- Price gap opened on the 7th from the resistance falling for 2 days.
- Broke the resistance and traveled above it on 11th then came back to resistance (which will now become Support) as price comes back people who missed the long trade when price broke last time are going to enter Long Position and people with Short position are gonna close their position this increasing the bullish order-flow.
- That’s why price rises from resistance line on 12th because it become support.
Same happens when support breaks it becomes resistance as shown in the image above.
Identifying Support and Resistance
- S/R are areas which have provided a barrier to further price movement.
- In most cases, this will display as turning points in the market (Strong Rejection of Higher or Lower Price sometimes Aggressive initiation)
- Let’s look at how we define these swing high and low areas.
- Swing high and low Technically aka Pivot Points (Pivot high and Pivot low)
- Swing High is Rejection of Higher Price.
- Swing Low is Rejection of Lower Price.
Swing Highs
- A swing high is simply any turning point where rising price changes to falling price.
- We define a swing high (SH) as a price bar high.
- Preceded by two lower highs (LH) and
- Followed by two lower highs (LH),
Referring to Image, the Swing High of candle C. All other candles reference this one.
- Candle A has a high which is LOWER THAN candle C’s high.
- Candle B has a high which is LOWER THAN candle C’s high.
- Candle D has a high which is LOWER THAN candle C’s high.
- Candle E has a high which is LOWER THAN candle C’s high.
Valid Swing High Pattern Examples
Example of Swing High Variation
Any combination in which the swing high is preceded by two lower highs and followed by two lower highs.
Example of SH Variation – Multiple Candle SH
Any combination in which the multiple candle swing high is preceded by two lower highs and followed by two lower highs.
Swing Lows
- A swing low is simply any turning point where falling price changes to rising price.
- We define a swing low (SL) as a price bar low.
- Preceded by two higher lows (HL) and
- Followed by two higher lows (HL).
Referring to Image, the Swing Low of candle C. All other candles reference this one.
- Candle A has a low which is HIGHER THAN candle C’s low.
- Candle B has a low which is HIGHER THAN candle C’s low.
- Candle D has a low which is HIGHER THAN candle C’s low.
- Candle E has a low which is HIGHER THAN candle C’s low.
Valid Swing Low Pattern Examples
Example of Swing Low Variation
Any combination in which the swing low is preceded by two higher lows and followed by two higher lows
Example of SL Variation – Multiple Candle SL
Any combination in which the multiple candle swing low is preceded by two higher lows and followed by two higher lows.
Drawing S/R – Areas (Zone) NOT Lines
- When drawing S/R areas on a chart, it will usually be done via a straight line.
- Note however that
- When price returns to this line it does not always stop at the exact price defining this S/R line.
- S/R is an AREA in which traders make decisions.
- Different traders will make their decision at different prices, and will act on that decision at different times within that area.
- During the conduct of your analysis it is imperative that you remain aware of the whole area, even though your chart may show S/R represented by a single line.
- Be aware that price may turn before the line; and that a turn before the line does NOT conclude an invalid S/R level or Zone.
Additional Areas of S/R
The vast majority of our S/R are defined by swing highs and lows, as described. However there are additional means of identifying S/R which must be consider if they’re prevalent in your chosen market.
As an example, a market may produce gaps which also define S/R areas. These are not so prevalent in forex or FX currency futures, so let’s look at an example from the Bank Nifty Index.
In above image on 26th Sept there was gap down which became S/R on 4th, 6th, 7th and 10th Oct.
On 4th Apr above image massive Gap up which became resistance for 6th, 7th, 8th, 11th and 13th. the above both examples shows Gup up/down support and resistance which don’t fit the Swing H/L def for S/R.
That’s it for Support and Resistance and we conclude this Volume 2 Price Action & S/R. All the above Support and Resistance lines & Zones can be Drawn and practice on TradingView. If you need Ideas on how to draw Support and Resistance Zone check this Article.
In next article will dive into Volume 3 : MARKETS & MARKET ANALYSIS with Multiple Time-Frame (MTF) Analysis.