Greetings traders and welcome back to another Survival Guide.
Chris here, bringing you some more information.
Today, we're going to be covering support and resistance.
Support and resistance levels are at the core of technical
analysis in the trading world, and when mastered, and understood,
and implemented correctly, can provide a substantial edge
over those that don't fully understand or know how to implement those levels.
We're going to cover exactly what support and resistance is,
as well as how to apply them, and how trading with them works.
We'll even switch back to some live charts and do it
in real time, without any pre-planning involved, so you can
see how it would work as you trade on a daily basis as well.
But before we go any further, please go ahead and click that
like and subscribe button down below for me because it allows
me to keep coming out with these videos for you guys.
Without further ado, let's dive on into that material so
you can be prepared to pass your Gauntlet Mini.
When it comes to technical analysis, there's this strange
temptation that traders find, where they feel like they need
to ignore the basics and look for something more complicated.
Something more complicated than say support and resistance,
but this could be a fatal flaw. Support and resistance has
been around for a while, and will continue to be around and
is actually one of my personal favorite styles to trade, and
hopefully at the end of this, you'll understand why. First,
what is support and resistance? Well, support levels are price levels
that identify an area where there has been a demand from
investors. Demand meaning, people want to buy, and when
people want to buy, it causes price to rise. Support is
an area where we expect price to go
up. Resistance is naturally going to be the opposite.
Resistance price levels are areas where investors have
historically looked to take profits, or to go short as opposed
to opening a new long position. Resistance, we can think
of as an area where the market is interested in selling, and for
whatever reason, we can think of support as "up" and resistance
as "down" and just simplify the entire process that way.
Now that we know what support is, as well as what is resistance,
let's take a look at this chart that I have three
lines drawn on. There's three horizontal lines here. You can call them trend lines,
you can call them horizontal lines, whatever makes you happy. It doesn't
matter to me, but they all represent different
areas of either support, or resistance, or potentially both.
As we look at the first line, the orange line on the top, we
notice that price didn't really reach this until this portion of the graph over here.
At least for what we can see. When it did, we notice price
hit it like a wall. Price ran into this area and had a difficult
time pushing beyond, and not only did it have a difficult
time pushing beyond, but all of the pressure of the inability
to get beyond actually led to a substantial
sell off. We had a sharp fall below this orange line when price couldn't make it above.
Then again, we worked our way back up to this level over here, and the
same thing happened. Now ignore my ugly arrow, but the same
thing happened. Price got stuck beneath this level, leading to a fall thereafter.
Ultimately, price did come back and continue to
get stuck beneath this level, until finally breaking through
over here, where it treated it then as a launching point to
continue rising higher. This is an example of an area of resistance that then turned
into an area of support. As we look at the blue line
below it, we have another similar story.
In the beginning on the left side of the chart,
we noticed that we found a lot of resistance around this
location. On three separate occasions, price rose
to this area, and then fell substantially. Rose, fell substantially,
rose, fell substantially. This is an area creating resistance overhead where the buyers
are having a difficult time working their way above the power
of the sellers, or the inability to gain enough buying to
raise price any further beyond that point.
This continued a few times later on in the graph,
until ultimately, it became an area of contention and actually
treated as an area of support as well.
It was rather sloppy during this period, but it did act as
a degree of support, and then it became more well-defined,
as we can see over here, and here, where we had three beautiful
bounces off of this area as support,
and remember, this was an area that was previously resistance.
The key takeaway is that an area of resistance can become
an area of support. An area of support can become an area of resistance.
They do oftentimes interchange what they
want to do, so we can think of all of these areas as areas of interest in the market.
Finally, we have a green line down here that functioned as support
earlier on, on the left on our chart, and this
is an area that ultimately had a nice break through it.
That means, the support continued to hold until it didn't
anymore, and price fell through. Price fell through right
here, and a lot of times when price breaks an area of resistance
or support, the pressure that allowed the market to move beyond
the level will carry the market heavily in that direction.
If we're breaking through the floor, we're breaking through
support, we can expect usually a substantial move to the downside.
Whereas if we're breaking through resistance,
we usually can expect a substantial move to the upside.
What makes support and resistance zones just so important
if you haven't already seen the value? Well, support and resistance
zones are very important because they indicate short, medium,
and long-term trending ranges.
As we can see with our previous trend, it allowed us to
notice areas that the market wanted to trade in.
It allowed us to know a floor, and it allowed us to know a ceiling.
If we know the ceiling and the floor, it gives
us a very good idea of where we should be considering to
potential buy, or to potentially sell, because we know how close
we are to that possible bouncing point on either direction.
If we're getting close to the ceiling,
it may not be a great idea to buy at that point because a
quick turnaround may be coming. The same thing holds true
for buying close to the floor. If we buy close to the floor,
we may not be happy with the results, as the market may quickly
bounce upwards. To better understand support and resistance
we should understand the terminology, as well as some of the
characteristics that we might see while searching or utilizing
support and resistance. Now using the same image that we looked
at before, where we had our orange blue and green line marking
off some areas of support and resistance,
we have retests and breakthroughs. A retest is going to reference
a point where price comes back to an area that was just tested
and shown to be an area of resistance or support,
and then continues to show the same action.
A retest is just a test that is occurring again and further
substantiating that we have indeed found ourselves a substantial
level in the market. As you can see here on the left,
we retested this level three times. Also below that on the green line,
we retested this level as we worked our way away from
it, then came back down to it, then worked our way away from it. Then
comes what is referred to as a breakthrough. A breakthrough
is quite literally when it breaks through the area of support or resistance.
It doesn't matter if it's breaking resistance, or if it's breaking support,
both of these are considered what is called a breakthrough.
We are breaking through the area of contention in the market,
which once again, is usually followed by a high degree of
volume that causes the market to normally push in that direction.
There are indicators, or drawing tools, that can help identify
or further your understanding of support and resistance, and
one of which is called the channel. We have the channel,
we have trend lines, all of them are essentially doing the same thing.
They are plotting a straight line, because we all know how
incredibly difficult it is to draw a straight line, I guess
that one wasn't too bad, but it helps us draw a straight line
with a parallel and equal and opposite line underneath it.
That's what we get with the channel. The channel drawing
tool will allow us to identify potential areas of support and
resistance at the same time.
As we see here with the channel that is already drawn,
it marks off an area that initially, over here, was support.
As you follow this, because of the value or because of
the characteristics that support and resistance like to share,
where they like to flip-flop, where support likes to become
resistance and resistance likes to become support,
it holds true with why a channel would be valuable in helping
identify this. Because at the top, we previously had support
and then when we fell below,
it then became an area of resistance right here.
The area down here was initially support and continued to hold as
support until it broke, and the market bounced off of it, using
that extra volume added from the breakthrough,
like we just learned, to push lower and break
the trend. The nice thing about paying attention to things like channels
is it allows you to make a clear picture of what the market is doing.
If the market is staying inside the channel, then we
know that the market is probably going to continue to stay inside the channel.
But if the market is moving outside of the channel, well,
then we know that something has happened in the market,
and the market is attempting to do something different.
It gives us a very clear moment when we have this break
outside of the channel, where we're aware that now we should
be on the lookout for a new trend formation.
It's important to understand that with support and resistance its fractal in nature.
We will find support and resistance on any time frame, on
any chart, and as such, we will find minor areas of support
and resistance, and we will find major areas of support and resistance.
The idea behind both of them is the same, except with the major area of resistance,
we're going to refer to this as an area that has turned the
overall trend and not just the temporary trend.
Because we rejected here and watched overall
price fall in this example, we call this a major area of resistance.
Again, it happened over here, once again turning the overall trend downward, but along the
way, we had minor area of resistances that led to temporary
downturns in the market. The same is true with the support.
We have minor areas of support along the way, but we only
have a couple major areas of support in this particular image.
Remember, support and resistance is going to be something
that can be scaled in and scaled out, and it's important understand
what degree of importance the level it is that we're looking
at has to whatever chart we're currently analyzing.
Now, let's have some fun and take a look at the E-mini S&P 500,
currently on 15 minute charts, and take a look at what happened
today, and this is September 30th 2020.
We're going to analyze price without any pre-planned lines drawn out for you,
so you can see what this might actually feel like as we're trading live.
The first thing that I like to do is pull up my drawing
tools by clicking the "show drawing panel" icon on the Finnamark platform here on the top
center, and after doing that, we can go over here and click the horizontal line tool.
Now I'm going to set the color to some kind of yellow to
make it easier to see for you guys, but normally I can see
just any of these lines just fine and I don't really mess
with the colors too much, unless I'm marking off different
time frames of support and resistance, kind of touching
on that fractal nature like we talked about.
Let's mark off our first level right down here on the bottom.
The reason is, as you can see, the market
bounced off of this area here and then again off of this
area here, creating a bit of a double bottom.
This is an area that the market came down to, found strength
as the demand built, and we changed hands. We came into this
with selling pressure, found a wall that the sellers were
having a difficult time getting through, and found a point
that the buyers were very interested in buying at, and as
such, we switched from a bearish market to a bullish market
during this phase of market activity. This is an example of finding an area of support and what this
means to us as traders, is because currently this isn't an area that has broken yet.
We haven't continued to trade below this since the creation
and confirmation of it down here.
This means, if the market were to continue down to this location,
hypothetically, I would be on the lookout to see if we start
showing signs of that increase in the demand as we see the
buyers begin building around this location, and I could look
for a buying opportunity to jump in somewhere around this
3296 area to potentially ride that upward momentum that
I expect to happen off of that area of support, once again hypothetically, of course. As we work our way backwards,
we can find these levels all over the market.
Let's find a nice area of resistance to you know, parlay
across from that area of support. Up here at the top,
we noticed that we saw obviously some kind of rejection occurring
that led to the market falling downwards, but let's see if
we can really kind of tune in on exactly where this line should probably be.
At 3358, this looks right about the right spot to me.
We did have a very temporarily break right here, just a short
break through, but what we had was a nice show of rejection
over and over along this line many times. Even after we broke
through, we came right back down underneath and rejected off
of it again, regaining my confirmation in my mind that this
is indeed a logical area of resistance in the market currently.
As we re-approach this market, had we been astute and paying attention,
there was a beautiful potential opportunity here
if we were to look for a sell opportunity around that 3358
as we approach, with an expectation of a fall to happen as
we reach a higher point than the buyers are willing to continue
buying at. If the buyers don't want to continue buying,
naturally we would expect the sellers to be winning the fight
at that point, and the only direction to go when the sellers are in control is down.
This is an example of an area of resistance functioning in the market.
If I get rid of my drawing tool, well if I get rid of my
drawn annotations, and continue moving, we'll probably see this
as an area that functioned at some point in the past as well.
In order to really kind of see that, there we go,
if we just continue to scroll back, remember I'm currently on a 15-minute chart
so it looks like I went through a lot of data, but realistically
we've only gone back to the 18th. We went back about 10
days, but lo and behold, we noticed that in the past,
this area functioned as a rough area of support as also an
area of resistance many times with a very beautiful touch.
This happened to be an area that the market would be contained underneath,
or contained above. This information, as you
might imagine, can be extremely valuable to us as traders.
If we have an idea of where the ceiling is, or where the floor
is, we can better aim where we want to place our buy and sell
orders, or even to potentially place our stop loss
just on the other side of one of these levels, because if
we breakthrough or break above this resistance level for
example, and we work our way beyond what we expect to hold
the market down, then it would be logical that a stop loss should be okay
just on the other side of that. Without having to give
away too much profit, we can quite tightly give ourself a location that is logical
to expect the market to hold on to this area
if it is able to climb back above. This is just some
examples of how we can find support and resistance throughout the market.
There are tons of levels in the market that we
can draw over and over and over again. We can continuously
find areas where the market has repeatedly rejected from.
The market likes to work from zones,
and if you correctly identify these zones with your ability
to correctly identify support and resistance, it can be an
extremely advantageous tool for trader.
In short, support and resistance is something that I could draw all day long and continue to enjoy it,
but obviously the video has to end somewhere because that's
when you get to begin practicing on your own.
Until next time guys, please do me a favor and click that like and subscribe
button down below so I can continue coming out with content
for you guys, and maybe if you want another video where we
draw support and resistance on the live charts, let us know in the comments.
Until next time folks, have a good time
trading, good luck to all of you, and I will see you soon.