Technical Analysis Series — Article #1: Support and Resistance

Technical Analysis Series

• Support and Resistance is a price level or region that the price of an asset does not fall below.
• For the price not to rise over a certain point indicates Resistance.
• Stop-Loss Orders are a special kind of order that gets you out of a trade at a predetermined price to limit your losses.
• Support and Resistance are essential concepts in technical analysis.
• You may examine market patterns by looking at price action about predetermined support and resistance lines. This is a crucial ability for price action trading, and it will also be helpful in other areas of technical analysis.
• To begin, please explain the support and resistance levels and how to find them.
• Since there are more buyers than sellers in a market’s support zone, that’s where the market stays put and makes its way back up. Conversely, akin to support levels, resistance zones are where the market rejects, and there is an excess of sellers over buyers.
• For your convenience, I have labeled several support (green) and resistance (red) zones in Figure 1 below (red).

How do you draw them?

• In technical analysis, two basic kinds of support and resistance lines are used:
• One kind of support and resistance line is horizontal and flat.
• 2. Using trendlines to draw attention to how and where price movement is moving.
• The flat horizontal variant is constructed by locating a solid support or resistance zone and drawing a line from that point (Figure 1).
• If you can’t discover at least two areas of resistance or support from which to create your trendline, you can’t draw your trendline. So the next step is to establish a pattern by connecting the identified supports and resistances, with more nodes indicating a more robust trend.
• In practice, there are three primary applications of support and resistance:
• (1) To initiate a trade expecting a reversal because there was insufficient momentum to produce a breakout. (See Figure 2).

To initiate a trade after a breakthrough in the belief that prices will rapidly advance toward the breakout (Figure 3).

Third, when the market goes against you, use stop-loss orders to limit your losses (Figure 4). This is quite similar to Option 2, except it’s used to get out of a deal that’s going against you.

Examples

• NVIDIA (NVDA) support and resistance trendlines are established horizontally (Figure 5).
• The resistance level may be traded by selling into it with a stop loss above it or buying on a breakout with a stop loss below it. A stop-loss order in either scenario would have prevented you from losing additional money on the fake out around 2007–2008 and given you time to resume the trade before the 2016 breakout. This amount of resistance also shows the principle of support turning into resistance and resistance turning into support. This area served as a temporary barrier for prices during the fakeout and again after the breakout, just before prices rose to new highs.
• Trading the support trendline is buying when price movement reaches the trendline and setting a stop-loss for when price action falls below the trendline, say $5.60 if you purchased in November 2008. When the trend reverses, it’s an excellent time to sell since the market is going negative (in this case, the support line did not break).
• The outline of an ascending triangle may be seen in these trendlines, and those who make that deduction would be correct. Patterns, however, are a different story and need their treatment.

A resistance trendline has been established using the three highest points in this S&P 500 (SPX) chart (Figure 6). To trade this, one would wait for the price to break out above the resistance trendline before purchasing, using a stop-loss if the breakout is a false signal. Then, a stop-loss order would be positioned below the trendline.

The XAUUSD gold price chart allows us to create a channel by identifying support and resistance points (Figure 7). A falling wedge pattern occurs inside the channel, which is usually seen as bullish. As soon as the pattern is broken, the resistance level is retested, with the idea of resistance turning into support. To trade this pattern, you would buy if the pattern’s resistance level breaks out, with stop-losses if price movement re-enters the channel, and you would sell if the pattern’s support level breaks down, with stop-losses if price action goes back up into the channel.

If we look at Bitcoin (BTCUSD) (Figure 8), we can see four peaks that we can use to create a trendline of resistance. Trading this would include placing buy orders above one of the peaks in anticipation of a break over the resistance trendline. To counteract one, I’ve drawn a green horizontal resistance line (which also has two touches, indicating a strong resistance level). If the price drops below the resistance

trendline, consider selling as a stop-loss strategy. Conversely, if price movement drops below the green resistance line (since resistance may become support), it would be a negative sign. In the preceding gold example, putting a stop-loss below a horizontal resistance trendline wouldn’t have helped, but it would have been a good idea to do so anyway in case the price didn’t rebound off the line.

Sounds Easy?

Please don’t fall for it. Trading is a complex endeavor that needs dedicated study. 90% of traders are consistently unsuccessful. Nevertheless, you may join the other 90% who do not if you invest in training and practice sound fiscal discipline. Always trade with a strategy in mind, use stop-loss orders to limit your loss exposure, and never trade greedily.

The views expressed here are those of the author and should be used only for that reason. This is not intended as financial advice.