7. Support and resistance

Greg Capra founder of Pristine trading school said: “Price is the only truth in technical analysis”.  I tend to agree with him. All other indicators are derivatives of price and cannot give you more meaningful information than price alone. In order to read price information correctly, it is crucial to understand the concept of support and resistance. In a nut shell, support is a price area on a chart, where demand is and resistance is a price area, where supply is located. Support and resistance are areas that represent commitment with real money. At support, buyers anticipate overcoming sellers and vice versa. There are 3 levels of support and 3 levels of resistance.

3 levels of Support

1. First level of support is previous bar`s low.

2. Second level of support is minor Support (mS): area of overlapping bars directly to the left of current prices.

3.Third level of support is Major Support (MS): it is a pivot low: bar with higher lows on both sides. Major support develops only after a prior high is overcome. 

Same applies to resistance in reverse:

3 levels of Resistance

1.First level of resistance is previous bar`s high.

2.Second level of resistance is minor Resistance (mR): area of overlapping bars directly to the left of current prices.

3.Third level of resistance is Major Resistance (MR): it is a pivot high: bar with lower highs on both sides. Major resistance develops only after a prior low is overcome.

Understanding support and resistance is helpful in determining correctly current market stage. For example, stage 2 uptrend is characterized by a series (two or more) of higher pivot lows, and higher pivot highs. Stage 3 is initiated by a break of major support. Downtrend is characterized by a series (two or more) of lower pivot highs, and lower pivot lows. Finally, markets transition into stage 1 after a break of major resistance.   

 

So far, we have been laying down a knowledge foundation. We will soon start incorporating all concepts into a tradable method. We have discussed support and resistance and how they relate to trends and trend changes. Strategies will be covered next.