A foundation for all of trading is being able to describe what the price activity is doing on a chart. Reading the chart is a process of identifying and describing where the price is and what it is doing. A basic tool is resistance and support lines . They provide evidence where the emotions of the market are clustered. Let’s define some key terms and illustrate it in a chart. This area is called support. It is as if the price stopped falling and is resting on a floor.
Resistance is the point at which the price stops rising and comes to a pause. It is as if a ceiling has formed.The first step in drawing a resistance or support line is to locate the price action on the chart . In reviewing the price movement, try to answer the questions: Then draw a horizontal line under the low and then above the high.
Support and resistance do not form instantly. Confirmation is usually needed to be sure that there is a zone of support. This often means waiting to see three failed attempts to break support or resistance.
Finding support and resistance is one of the first steps in developing a trading strategy. If a trader wants to buy into the market, one of the best locations to buy will be near a support area. If a trader wants to sell into the market, one of the best locations to sell will be near a resistance area. This is because if there is strong support, it is likely that a low in the price has been established and if there is strong resistance, it is likely that a high in the price has been established.
In short, once a support line or resistance line is established, it has identified for you a top and a bottom. Locating a
support and resistance line is also important because it will help reduce the risk of loss of a trade. Another feature of support and resistance lines is what happens when a price goes through a support line and falls below it. What happens when a price goes through a resistance line and pushes above it?
When these events occur, and they occur all the time, the support line begins to act as a new resistance line. The resistance line begins to act as a new support line. We can see this shift and intimate relationship between support
and resistance.An important question that should be asked is this: How strong is the support or resistance? The stronger the support or resistance lines, the greater the confidence the trader has in using these lines to shape a trade. There are many ways of identifying the degree of weakness or strength of support andresistance lines.
The first tool is the price itself. If a support or resistance line has been touched many times, this indicates that the line is strong and holding the price from going through it. Many traders use three touches to confirm that the lines are good lines to locate possible entry positions. It’s useful to keep in mind that higher time frames provide more evidence of the strength of support or resistance.
When a price action is probing a day support or resistance line, it is evidence that sentiment is changing much more than a price action probing an hourly support or resistance line. This logic further confirms that four-hour, day, and one-week price action charts should be the basis for trading weekly binary option contracts.
As you can see, support and resistance is not one-dimensional. Making a judgment about the strength of support and resistance requires a multiple time analysis as well as looking at the price action in relationship to other patterns such as Bollinger Bands and the presence or absence of doji candles.