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[S1166]Support And Resistance Trading

by Lance Beggs, Lan

* Identify setups which provide the potential for lower risk and/or higher probability trades.
* Enter and manage those trades in a consistent and disciplined manner.
* Minimize risk.
* Manage your money.
* Manage your emotions.
* Journal your results, and review them to identify what's working and what's not working.
* Keep doing what is working, and
* Improve what is not working.

If you're not trading successfully, it's because you're not doing one (or perhaps all) of these things.

There are no secrets!

So, it's time to stop searching for this holy-grail solution and get down to some good old-fashioned work.

And where better to start than the first item on the above list - a setup which provides the potential for a lower risk and/or higher probability trade.

Every technical analysis book on the market shows a number of charts with horizontal lines, and labels them support or resistance. Why is that? Because they look cool, and you can show your friends how clever you are at analyzing the market? Well, yeah, perhaps that's part of it. But have you ever really stopped and asked why you should care if the price action can be bounded by a line? What does it really mean if price has been unable to break through a particular level in the past? Why should you care if price consistently rallies every time it falls to a certain level?

The reason we care is because support and resistance are providing you with setup areas with the potential for lower risk and/or higher probability trades. While there are numerous ways to define an area of low risk and/or higher probability trading, I have not personally found one that works for me as well as the concept of support and resistance.

So, how do support and resistance work?

We discussed in a recent article how price moves, due to an imbalance between supply and demand. When there is more demand than supply, price rises until they are once again balanced. When there is more supply than demand, price falls until once again the supply/demand balance is restored. We can also use this concept to explain support or resistance areas.

Let's first consider resistance.

Price rises while demand is greater than supply. As price rises though, it will become less attractive to the buyers, leading to reduced demand. And it will become more attractive to sellers, leading to increased supply. If the supply/demand ratio can be tipped in favor of supply, price will fall.

Resistance is simply an area which has shown past evidence of halting a price rise. Price hits the resistance zone, and turns around to fall again. If it helps, think of resistance as a ceiling that resists any further price rise.

Support works much the same. Price falls while supply is greater than demand. As price falls though, it will become less attractive to sellers, leading to reduced supply. And it will become more attractive to buyers, leading to increased demand. If the supply/demand ratio can be tipped in favor of demand, price will rally.

Support, then, is simply an area which has shown past evidence of stopping a price fall, and leading to a price rally. If it helps, think of support as a floor that supports price.

At this point you might have two questions.

(1) Just because we can identify support and resistance in the past, how does that help us with our trading right now? After all, we don't trade history; we trade the hard right edge of the charts; and

(2) How does this provide us with the opportunity for a higher probability and lower risk trades?

Previous support and resistance can be found in a number of areas – previous swing highs or lows, areas of congestion, round numbers and gaps. When price returns to these areas, there is a good chance that they will once again act as support or resistance. This occurs for one of the following two reasons:

(a) Traders expect it to act as support or resistance, and so trade accordingly, thereby creating support or resistance; or

(b) Traders have a psychological need to trade in this area, which once again creates the support or resistance zone.

The simple fact that we can now expect these areas to provide support or resistance again, and therefore stall and possibly turn price, provides us with a higher probability trade.

And the closer we can get our entry to the point of support or resistance, the lower our risk on that particular trade, because our stop can typically be placed just beyond that support or resistance zone.

In the follow-up articles, we'll look at a number of charts to provide examples for each of the types of support or resistance (swing highs and lows, congestion areas, round numbers and gaps). We'll discuss the reason they occurred (whether due to expectation or a psychological need to trade), and give examples of how these areas can be used to provide a great trade setup.

Till then, review your setups, and ask yourself whether you're planning your trades in an area which provides a low risk and/or high probability trade.

And please remember, although support and resistance allow a trader to identify areas in which price is likely to stall and possibly reverse, there are no guarantees. You need to always ensure proper application of risk and money management.

Happy trading,

The concept of support and resistance is extremely interesting, and one which will help you considerably in the timing of your trading decisions. Yet it is a very simple concept to grasp. Support and resistance are basic tools used by traders to identify key reversal areas. As the names suggest support acts to keep the price above a certain level, whilst resistance acts to keep a share's price below a certain level. Drawing support and resistance lines on charts, allows us not only to determine where these levels are, but also to consider future price movement in relation to them. Oh and don't worry, all charting packages have the facility to draw lines on the screen.

Firstly, let me try to explain how and why these levels arise. Imagine a price is moving up and then subsequently starts moving down again. At the turning point there will be many buyers trapped who did not sell before prices moved down, and have decided to wait until the price moves back up again before selling ( they are living in hope ! ) Let us assume now that the price has stopped falling, and has started rising again. As it nears the point at which it turned the first time, those trapped buyers breath a sigh of relief and sell at breakeven or slightly less, which forces the price back down again as there is now more selling pressure than buying pressure. Naturally in the up move there has been buying, and these buyers now become trapped as prices move back down again. Now this can be repeated many times over, and you will see many different instruments including shares that behave in this way. In some cases this price action can last days, weeks or even months.

At the point where prices were falling and then started rising, exactly the same thing is occurring, but in reverse of course. We now have short sellers who are trapped at the bottom and have to wait for the price to come back down to them, who gratefully close their positions when this happens, to be replaced by more short sellers who are then trapped in turn..... - I think you get the picture.!!

When this price action happens, it has several consequences. Firstly it produces what we call a channel and the instrument is said to be channeling ( or range trading ). The prices form a defined channel with two lines that can be drawn, one above, and one below. Now the important part for us is not to practice our drawing skills, but these lines actually help us considerably. Once one of these lines is penetrated by prices, it becomes a line of support ( for prices going up ) and a line of resistance for prices going down.

Let's imagine we have been watching a share for some months which has been trading within a channel. Suddenly we notice one day that it has broken above the line and prices are now moving up. The line that was originally resistance to higher prices has now become a line of support and we can trade with more confidence, knowing that if the prices are going to go back down again they will have to penetrate this line of support or floor if you like. If you imagine a building with two floors, prices have moved from the ground floor through to the first floor, and what was the ceiling, has now become the floor. In other words it has become a SUPPORT to higher prices and will take effort to penetrate if prices fall back. It gives us a little more comfort ( but not too much ) in now buying into the move.

Using the house analogy again, we can see what happens at the bottom of the channel. Suppose we notice one day that prices have gone through the ground floor and into the basement, what was the floor has now become the ceiling and has become RESISTANCE to prices going back up to ground floor level.

Now, one final point on support and resistance. This occurs when prices ?gap up? or ?gap down?. This occurs when the opening price the following day, has opened at a different price from that which it closed at the night before. Now the reason I mention it in the context of support and resistance is simply this - if prices break out of a channel with a gap up ( going up ) or a gap down ( going down ) this adds weight to the move and weight to your decision to trade. The reason the gap has formed is because the market makers have opened prices with a significant gap ( up or down ) - they have done this for a reason. If it also coincides with a break out from a channel you can be reasonably sure that this confirms the move and therefore has more significance. Look out for them, they are worth the wait!!

Article Source : Pg. 113

About Author

Both Lance Beggs & Anna Coulling are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Lance Beggs has sinced written about articles on various topics from Finances, Trading Strategy and Finances. For a continuation of this series of articles, including chart examples of support and resistance at swing highs and lows, and areas of congestion, see my article directory at. Lance Beggs's top article generates over 18100 views. to your Favourites.

Anna Coulling has sinced written about articles on various topics from Stock, Investments and Investing and Trading. Anna is a full time currency trader who specialises in helping women to learn how to trade and invest. She has been trading for over 15 years, and everything on her web site is provided free. For further information please click on the following link :. Anna Coulling's top article generates over 5400 views. to your Favourites.