You learned about trading support and resistance in the previous lessons.
Let’s go over what you’ve learned thus far.
The highest point reached before the price falls back is now resistance when it moves up and then pulls back. As the price climbs back up, the lowest position hit before the increase is now considered support.
Support and Resistance are Zones
It’s important to keep in mind that support and resistance levels are rarely exact figures. It should be thought of as “zones” rather than precise figures to assist you to filter out false breakouts.
Plotting support and resistance on a line chart rather than a candlestick chart can help you discover these zones.
Support and Resistance Can Reverse Roles
Another thing to keep in mind is that when the price goes through a level of resistance, that level of resistance may turn into support.
The same could also happen with a support level. If a support level is broken, it could potentially become a resistance level.
Role reversal is the term for this concept.
Trend Lines
An uptrend line is formed along the bottom of plainly recognized support regions in their most basic form (valleys).
The trend line is drawn along the top of easily identifiable resistance areas in a downtrend (peaks).
Trends can be divided into three categories:
- Trending upwards (higher lows)
- A downward trend is present (lower highs)
- Trendless or sideways (ranging or flat).
Trend Channels
There are three types of trend channels:
- The ascending channel is the higher highs and higher lows.
- The descending channel is lower highs and lower lows.
- The horizontally running channel is ranging.
Simply draw a parallel line at the same angle as an uptrend line and move it to a position where it touches the most recent peak to create an up (ascending) channel.
After that, draw a parallel line at the same angle as the downtrend line and move it to a location where it touches the most recent valley to establish a down the (descending) channel.
Then, draw a parallel line at a zero or flat angle to create a horizontal (sideways) channel.
How to Trade Support and Resistance
Trading support and resistance levels can be divided into two methods
- The “bounce“
- The “break“
When trading the bounce, we want to improve our odds by finding some kind of evidence that the level will hold.
Instead of purchasing or selling immediately away, wait for it to bounce first before making a decision.
You avoid those moments when price moves so quickly that it slices through support and resistance levels like a knife through warm butter by doing so.
Alternatively, your warm hand.
There are two approaches to trading the break: aggressive and conservative.
When trading aggressively, you buy or sell whenever the price easily passes through a support or resistance zone.
The conservative approach is to wait for a “pullback” in price to the broken level, then enter when the price has bounced.
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