Hello traders, I'm Luke from Disciplined Trader In this video I want to discuss support and
resistance analysis.
We will go over what it is, why it works and how to use it.
So lets start with what support and resistance is.
I think when a lot of traders think of support and resistance they think of pin-point lines
on a chart that try to predict where the price will turn on a dime but it is more complex
than that.
Lets start with the basics
S&R refers to the technical analysis of price areas where the price action will potentially
pause and change direction in any given market.
If there is a price area below the current price action that has the potential to stop
the price falling further and change its direction we call this support
If there is a price area above the current price action that has the potential to stop
the price rising further and change its direction we call this resistance
Price can and does break through these price areas all the time.
Typically when price breaks through a particular price area that has been identified as support
or resistance, it will become the opposite to what it was before.
So if price is rising and it breaks through an area of resistance, that resistance area
now becomes a support area for price.
And the same is true in reverse.
If price is falling and it breaks through an area of support, that support area now
becomes a resistance area for price.
There are different types of support and resistance levels and I like to split them into two categories.
Static support and resistance and dynamic support and resistance.
Static, as the name suggests, are support and resistance areas that don't move.
They are identified by the specific price level that the historical price action has
shown them to be at.
This is the main type of support and resistance people know and refer to when they talk about
S/R. Dynamic support and resistance is the opposite,
it refers to support and resistance levels that move they are not at a fixed price.
I use two dynamic types of support and resistance as part of my trading strategy which are daily
pivots and moving averages and these levels change regularly.
Daily pivot levels are specific levels of support and resistance that change on a daily
basis.
So I will have a set of daily pivot levels plotted on my chart on Monday and then these
levels will change on Tuesday.
Monday's pivot levels are now no longer of interest to me on Tuesday, as all the levels
have changed.
Moving average levels are dynamic as well as they are constantly changing with the formation
of every candlestick.
Dynamic support and resistance levels such as daily pivots and moving averages usually
plot themselves through indicators within a charting platform.
So if you add daily pivots and moving averages to your chart, the levels will update as soon
as they need to.
Static S&R areas usually have to be identified and plotted manually so let's look at how
we do this.
We can identify these price areas by looking at the historical price action on our charts.
We are looking for price areas where the price has been heading in a particular direction
and then has stopped and reversed in the other direction.
Equally we can spot an area of support or resistance if the price has been heading in
a particular direction and has paused for a significant amount of time before breaking
through the area and continuing in its original direction.
Sadly, support and resistance areas aren't as clean in reality as demonstrated by these
illustrations, so lets jump over to the charts and look at some real life examples.
You may have heard the phrase "the markets have long memories".
This refers to the fact that a very old support or resistance area can become significant
way in the future.
And although I do agree with this, I do have one rule I like to use when looking for support
and resistance areas, and that is that new is better than old.
What I mean is I will attribute more significance to an area of support or resistance if it
has formed recently versus one formed say a significant amount of time ago.
Obviously this depends on the time frame you are looking at if we were looking at a daily
chart, I would attribute more significance to a S&R level that had formed in the last
couple of months versus one that formed a number of years ago.
You may or may not agree with this view, but it is one I have found to be useful more times
than not.
So apart from helping to identify potential trade areas, one of the other common uses
for Support and resistance is helping us identify whether a market is ranging or trending.
If price is making higher highs and higher lows by breaking resistance levels and using
them as support, then the market is said to be trending upwards and if it is making lower
lows and lower highs by breaking support levels and using them as resistance, then it is said
to be trending downwards.
If the market is moving sideways between two levels of support and resistance then the
market is said to be ranging as it is not making any significant movement to the upside
or downside.
Some traders have strategies that they will only employ if the market is trending or ranging
so using this analysis helps them to decide whether to implement a particular strategy
or not.
So why does S&R work?
Put simply, support and resistance areas work because lots and lots of traders are watching
them.
Traders identify these areas because you tend to get a lot of trading activity at these
levels.
Some traders will be waiting to trade the reversal at the identified area and other
traders also like to trade breakouts whereby price breaks through the support or resistance
area and the trader takes the trade in the direction of the break.
So if price broke through a support zone, the breakout trader would sell the market
in anticipation of the price falling further as it has broken through a support area.
All of this increased trading activity usually results
in either a victory for the buyers or the sellers and because more traders are active
at these levels, the reversal or breakout usually happens with some purpose and intent
which is what makes trading these opportunities so attractive to traders.
However, it is worth mentioning, as with all forms of technical analysis, support and resistance
is an art not a science.
There are going to be occasions where the market seems to just forget that a support
or resistance level is even there.
It may just blast straight through it without even giving us an indication that any kind
of reaction took place there at all.
Or it may break a particular S&R area, and then reverse having broken the area.
We call this a fake break and can trigger breakout traders into a losing trade.
It can also frustrate reversal traders as the signal for the reversal doesn't happen
in the identified s&r area.
What we as support and resistance traders have to do, is have other mechanisms within
our trading strategy to refine which opportunities we take at support and resistance levels other
than just identifying them and waiting for the price to reach them.
If trading was that easy, we would all be millionaires!
So how should you use it?
For me support and resistance is a key part of my trading strategy, but I do not use it
in isolation.
I have other analytical techniques that I use and wait for to give me confluence before
trading.
If I were to trade solely using support and resistance, I wouldn't be profitable simple
as that.
I personally think support and resistance works best when you
use it as one of a few layers of technical analysis that make up your trading strategy.
For example, you can use it as the foundation of a strategy and build
on it with a few different types of dynamic S&R like moving averages and Fibonacci levels.
Or you can use it to build on a strategy where the foundation comes from something like Elliot
wave theory and look for particular candle patterns when both streams of analysis line
up.
Like with any successful trading strategy, you need to have more than one analytical
method.
If you have a few and all the analysis lines up for a particular trade, then this gives
the trade confluence as it has a number of factors telling you there is a good chance
this trade will be
a profitable one.
I hope you have found this video useful.
Thank you very much for watching.
If you enjoyed the video, please feel free to drop a like on it.
If you have any questions or want me
to
cover any other topics in future videos, please let me know in the comments below.
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Thank you again and I hope you all have a good trading week.