Support and resistance levels are price zones, right there the fate of a trend is decided. These lines show us, what’s happening in the market right now: in which direction it is moving, what is a good moment to enter or leave it.
These price zones form at the points of a trend reversal. In order to record support or resistance lines, traders need two conditions:
- at least 2 bullish and 2 bearish candles at the pivot point of the price
- at least the second point of the same turn to confirm the presence of the line.
Experienced traders have support and resistance levels as close as possible to the right edge of the chart at each time point.
Lines work on any timeframe, the longer the timeframe, the stronger the line.
The levels cannot predict, the fact of a breakdown is only important.
We can admit a change in the trend only taking into consideration the fact of the breakdown. The direction in which the level can be broken often indicates the direction in which the market will move further. If the support level is broken, we mention that it is no longer relevant. The trend in the market is downward, and the market will move downward rather than upward. Breaking through the resistance level works the same way.
The breakdown can be admitted if a candlestick opens and closes right above the resistance level, and below the support line.
You have just read the summary of the first property level: the direction of the breakdown shows the possible direction of the market. How it works, we have discussed in detail in the first part about properties.
The property of support-resistance lines №2: the price is more likely to beat off the level than it breaks through it
It will be great if the market punches the line and goes to the moon, or reaches the bottom. You only have to set a limit order and enjoy the moment. But in real life, it goes not the same way.
If the market comes to the nearest target and the closest targets are always support and resistance levels. Some traders prefer to close all or only a part of their positions. That’s why the market often slows down if it comes close to the level.
It is important to understand what is happening at this moment: the balance of power between buyers and sellers changes.
The buyers, which were ready to pay a higher price, start hesitating. The reason for the doubt is that according to the second property, the market may beat off the level and turn down. Overwhelmed by these doubts, some buyers join the dark side: close and sell their positions, it drives the market down.
It’s important to take it into consideration in order to define your goals — an exit points from the market.
The market breaks the level using several candles.
If the breakdown happens, instead of a victorious strike made by a huge candle, the breakdown will be nonlinear. The market will reach the level, the trades will be fluctuating for some time close to it, and only then they will break it.
The market tests the level for the first time. Price reaches the line, then the long shadow of the candle breaks through the line, but the coin still does not cross the line:
In such cases, it is said that the price bounces off the level.
By the way, aggressive traders may trade using this local bounce off. For example, on the daily timeframe below the resistance level, you see a candle with a long shadow that breaks through it, like in the picture above. The same situation on a 5 or 15-minute timeframe can be a real downtrend if the market moves up quickly and then returns to the resistance level and closes below it.
Price often not only comes close to the line, but it also soars. It looks like a huge candle:
This situation may give you a hope that the next candlestick will be huge too. As a rule, the opposite happens:
The next candlestick, which forms in the resistance zone, will be small. The market, like a concerned, but indecisive lady, coming close o the line, fluctuates.
This has three reasons (we discuss the market, not the lady😀):
1) Some traders, which bought inside the previous bullish huge candle, will fix the profit using some or all opened positions.
2) Another part of the same audience, which actively pushed the price during its rapid growth, while a huge previous candle was forming, right now they stop purchasing as quickly as before. They know that in the area of the resistance level the market can fluctuate and may even beat off and slide down. It will be possible to enter at lower prices if it slides down, so what’s the reason for purchasing right now? If the market continues to grow, you have to spend more, but the signal of the upward trend has a different quality — in fact, the breakdown level, it’s a reliable signal to enter the market.
3) The most active traders, which trade using “counter-trend” principle, they will try to push the price. They will also try to “sell” the market: trade short, trying to lower it, focusing on the fact that the market will beat off from the resistance level and slide down.
What to do?
The answer depends largely on your strategy.
It’s easier to mention what you shouldn’t do. It is not necessary to close the position near the level. In some cases, it is logical to hope that the market will continue rising and reach 2, 3, 4, 5 levels. Your optimism should be based on facts.
Emphasis instead of conclusions:
- The second property of the levels is that the price may break away from the level than immediately break through it.
- The breakdown is non-linear. Reaching the level, the price usually slows down and fluctuates near the mark, it’s testing the level.
- You can see the breakdown if the price opens and closes strictly above the resistance level or below the support level.
- It’s a signal to open positions if you see the level breakdown. If the price just reaching the appropriate level, this can also be a sign for entering the market, but you should keep in mind that there may be more available options.
- The closest and following level can be the targets for leaving the market.
- The second property works great while a downtrend with resistance levels, also, during the uptrend with support lines.
And now, it’s time to repeat:
- Open TradingView right in 3commas:
SmartTrade — choose “TradingView” check mark
- On the current or historical data, find the situations described above :).
If you follow these rules, you’ll be ready for the third part of property trading rules.
In the third part, you will learn what happens if the support and resistance lines were surpassed, and how to determine the best market entry points. The best points mean that they have high potential and low risks, compared with alternatives.
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