Supports and Resistances : Everything You Need to Know

Supports and resistances are horizontal lines on the edges (borders) of congestion areas. The bottom line is the support: the level where buyers strength overcome sellers, and buys are strong enough to reverse the downtrend. The top line is called the resistance: level where sellers strengh overcome buyers, and sells are strong enough to reverse the uptrend.


It is more preferable to create your support and resistance lines along congestion area's borders than extreme price action, since these borders illustrate the point where most traders changed their mind, whereas the extremes are only reflecting a few people panicking.


Psychology

Traders remember at which price they bought or sold, and this is what create supports and resistances.

Support and resistance zones often switch roles: when a support is broken it will become a resistance, and vice versa. This happens because as the market makes a breakout downwards, buyers feel pain and wait for a rally to free themselves without cost, whereas sellers regret and wait for a rally to have a second chance to short. The buyer's pain and seller's regret create the new resistance.


A support or resistance is going to be more significant if the preciding price action was steep rather than a slow ascending or descending trend.

Volumes

Low volumes around a resistance or support area indicates its fragility. Traders aren't feeling quite involved in it. However huge volumes show strength in this level.


Trading Rules
1. When you are surfing a trend that is reaching its support or resistance, move your protection stop closer. The trend will reveal its health at this point: it can either go faster and your stop isn't triggered or it can bounce on the Trend line and your stop securises your profits.
2. Supports and Resistances are stronger on a bigger timeframe. Weekly charts are stronger than daily charts. This way, if on the weekly the price is flat and on the daily the price action is hitting a support or resistance then the signal is less important than if price was reaching a support or resistance on the weekly.
3. Resistance and support levels are usefull to setup stoplosses and take-profits orders. If you are buying, the lowest value in a support area can be used as a stop if you place it just underneath.

Breakouts

A breakout happens when the price breaks out of its trading range, but most of breakouts are fake breakouts.
Be careful of fakeouts : it is more often an opportunity to position against them, with a protection stop.
"Fakeouts" or "fadeouts" are when the price tries to break a support or resistance but end up returning in its trading range. How to know when a breakout is fake or not?
True breakouts are confirmed by high volumes and technical indicators showing new highs or new low. Also we should be able to see the new trend on a higher timeframe.
Fake breakouts tend to happen on low volumes and indicators divergences.
In order to trade fadeouts, wait for price action to stop making new highs or lows. This is when prices fade. Then, place your stop on the extreme, risk is low, but chances are that price will make a pullback in its congestion zone.

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