This is one of the most basic of concepts when it comes to trading; however, many may not have the best understanding so, I deem it an important topic. Use this as a guide, along with diligent research on the topic because there are many other definitions and concepts that may be helpful in your learning such as, reactive and proactive support and resistance.
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Generally speaking, a support and resistance line is a horizontal line drawn at significant price levels, where price touches or bounces several times and seems to react strongly on either side, in a specific time period.
It is important to note that the time period is very important. You will notice just how important time periods are as you progress. If you have not already, check out this article on timing and multiple time-frame analysis.
On a slight tangent: As I am not part of his (ICT) mentorship, I mulled over the concept of ‘time THEN price’ for some time. I like to do the majority of my analysis on whatever time-frame I am using for a specific pair of currencies.
AUD/SGD seems to move a bit slower so, I trade it on a higher time-frame, for example.
But the point I am making is to look for clues or “footprints” of the smart money within the time-frame you do most of your analysis.
Say, you trade the one-hour chart but notice a nice setup or recognize the market structure on a weekly chart. Even though your analysis may be correct, are you paychologically prepared for wild swings while price moves towards your target area, possibly taking months, instead of a few hours? Do you have your stop loss set far enough away to not be triggered by market manipulation? Do you even have enough capital to risk that much?
The best trades are made with simple rules but there are many concepts that need to be taken into consideration to make consistently profitable decisions.
Veering back to the topic of discussion, seems like a good time for an analogy. I think it will be especially helpful with support resistance channels but it could just be another unnecessary rant.
Think of support as price in a depression that needs support to lift it up.
Price that gets high is in trouble with the law.. Let’s say it starts “resisting” arrrest, until it comes down and sobers up.
By now, I’m sure you’re used to fuucked up analysis. Get over it. I bet you’ll never forget. 🙂
The way I draw my lines will not always be to the very bottom. Some traders may draw lines at the tail end of either end.
Some may show only the closing price of a specific time-frame and leave out the tails of price.
Remember, the tails of a japanese candlestick, is where price traded to within a fractal of time.
Based on the concepts I have studied, I look at strong price points and areas of interest. I, also, like to look at the highest or lowest price before the absolute high or low.
The reason for this is to try and better understand market behavior. Without help from Ms. Cleo, the only way to predict future price is by studying the left of the chart. Like, you can’t go anywhere without knowing where you’ve been or however it goes.
There are several players in the Forex markets: Big institutions, banks, hedge funds, corporations, brokers, retail traders, even people on vacation or sending money to family in another country; although, the latter can probably be priced in with the banks that are making the transaction.
The point is that the bigger players are “directing” the flow of money. They are in the game but are synonomous to the casino.
Retail traders, I see as two main “gamblers” which, is a word I really dislike and discourage people from thinking this way. But for this analogy, I’ll allow it.
One type of gambler puts his or her money in and crosses their fingers, hopes for the best.
The other is reading books on gambling theory, counting cards, straight faced at the poker table with a rules-based system that has zero room for error. When uncertain of their success, this “gambler” analyses risk:reward before continuing their play.
Back to trading and how this relates to where a horizontal line is drawn: Imagine on a chart, there is huge selling pressure. Call it what you want, price is going down, with short pauses to the upside because price never moves vertically (not for too long anyway).
As the price moves down, for whatever reason, we are not going to concern ourselves too much with the reason because usually, this is nothing more than an excuse to justify a loss or bump up our ego on a win. Anyway, as price continues lower, more retail traders see this and jump in, looking for “the big one”.
Probably the most common form of support and resistance involves a parallel channel. Many patterns that you will learn will consist of support and resistance, as well, but will be in the form of wedges and triangles. Save for another day.
This is the first type of trader that is literally gambling. As more of these gamblers put money in, the pot gets bigger so, you will notice price trade even lower then, out of nowhere like the cha-cha slide at a country musical fest, “reverse, reverse!” Double time (get it?).
Support and resistance lines can also be drawn diagonally.
A similar method can be applied when these lines are drawn, as well. In case you are not familiar, there is a popular concept that rising channels will have a break in trend that decreases, many times at a rapid pace.
Falling channels, at some point will break to the upside.
If one was to apply a strict set of entry and exit rules with this knowledge, a simple trading strategy. Always keep it simple. Moving parts may be astonishing and flashy but the best products are built with less moving parts and easier to fix.
We will talk more on liquidity later but remember, there is always someone at the other end of a trade whether, it is another retail trader placing a spot order or having a buy stop or sell stop in place to enter or exit a trade. Or it can be the broker purchasing orders to distribute later.
Depending on the time of day, liquidity will differ but you will notice in trading spot Forex that if you place a direct order, it will always be filled right away. Place an order at the wrong time and the broker may be the only one on the other side. They may have a rule that forces them to purchase x amount of units in the opposite direction.
At hours of low liquidity, the spread increases which, puts any trader placing an order even further away from the average price range.
Markets open, liquidity and institutions open orders and price continues to trend within the channel.
This is just an example of why the market may behave a certain way that seems to move against you.In essence, it did but in reality because of a bad trading habit, you moved against yourself (in other words, take responsibility for your own actions, or some shit your mother used to say. See, and you though she was just being a bitch. She was. But she had a good reason. Give her a hug if you still can.)
Finally, we glance at market structure. It is said that markets are in a specific range 70% of the time but if we could set an endpoint to the markets, I theorize that it would be 100% because on a mathematical level there would be a highest and lowest point and every other price would be in that range.
My philosophies; however, would probably make for a good bedtime story so, is not important.
Looking at the way prices are stuck in these fractal ranges, we can draw support and resistance lines at these levels and watch for breaks in these areas.
An aggressive play would be to trade on the initial break. Personally, I prefer the popular, more conservative approach of waiting for price to pull back to the initial break point before entry, to avoid false breaks; although, you may have to drop down to a lower time-frame to notice the pull-back.
Either approach will work, depending on personal trading style and the proper risk:reward ratio.
That concludes this article. This is another tool that can be added to your arsenal. Remember that simple strategies work the best and it is always best to test these theories in a demo account first.
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