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PART 2 : Support and Resistance, Complete concept with examples

Support and Resistance
Hello Traders, I will be discussing about Support and Resistance area in this part, which is backbone of Price Action trading.

What is Resistance area?
Resistance is a horizontal area on a chart. Where price experience selling pressure and tends to move down.
What is Support area?
Support is a horizontal area on a chart. Where price experience buying pressure and tends to move up.

Why do we need Support and Resistance?
Support and Resistance area often helps to set Target, Entry and Stop loss.

Guidelines for Drawing Support and Resistance:

For the same chart if you ask 5 traders to draw support and resistance area, you will get 5 different result. So, what are the important things to consider?
I prefer drawing horizontal line instead rectangle to make chart look clean and easy to understand.

Use Higher Time frame to draw Support and resistance area. For Instance, If you trade on 5 min chart then use 15 min chart to draw horizontal line. However, if you prefer 15 min then use 1H or 4H.
Draw Horizontal Line which shows multiple touches. While, this line act as great support and resistance area compare to few touches which was due to volatility.

Things to know:

The more times support or resistance are tested in a short period of time, the weaker they become.

So, what’s the logic behind this? One of the reasons is due to Institutional Traders prefer limit order on these areas, so whenever market touches the price, the limit order is filled only some quantity and the remaining quantity is filled after price comes to the same level. Once all orders are filled completely, there is no buying pressure and thus it falls significantly.

When the price breaks support, it could become resistance and vice versa.

There are 3 possible reason why this happens?

Closing losing trade on breakeven. For example, let’s say you took Buying position on the support area and price went opposite direction and you decided to exit on breakeven instead of taking red. Thus, it creates an extra selling pressure.
Traders who missed breakout move. For instance, you missed the breakout and you decided to enter only when price retrace back to get a better entry point. So, this also create a selling pressure and leads to resistance area.
Traders who choose to enter retest levels. This is a entry strategy which many traders use.

There are several way to find Support and Resistance area:

Using EMA (9, 20, 50, 100, 200) are widely used to identify support and resistance area. For my trading I prefer 9 EMA in Trending market, 50 EMA for buying Dips and 200 EMA for ultimate support.
Using Trend Line, Same logic as support and resistance area, if there are multiple touches in Trendline then probability is high that there will be Buying/ Selling pressure.
Using Channel: this is useful when market is slightly up trend and downtrend as during that time market mostly moves in zig zag way and channel works perfectly.

Ok so in next post we will be discussing our Entry Signal and we will connect all 3 PART to decide buying or selling.

Summary

Support is a horizontal area on your chart where potential buying pressure could come in and push the price higher.
Resistance is a horizontal area on your charts where selling pressure could come in and push the price lower.
The more times support or resistance is tested within a short period of time, the greater the likelihood it will break.
Observing support and resistance is one way to identify an area of value on your charts. Others include looking at the moving average, trendline, channel, etc.