Disclaimer: The views on the posts and charts are for educational and illustration purpose only, as past performance is not necessarily indicative of future performance. They are provided for general information only and therefore should not be taken as any offer or solicitation to do any investment or trade.
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Support And Resistance In Price Action Trading
Support and Resistance in Price Action Trading is a very important concept . It is so critical to understand it that I would like to discuss this in the early part of our trading journey.
Whether you are trading stocks, forex, CFDs or commodites, Support and Resistance are the important levels that guide you on your charts for entries and exits. Knowing these levels as they are plotted on your charts will allow you to understand the traders’ sentiments and their price actions.
Price actions on a chart are the direct results of the buying and selling activities of traders in the market. Consequently, price action tells us what the supply and demand equilibrium is at any given point in time.
If a stock is moving higher, it will eventually move to a price level at which it finds resistance to advance further. This is the price action level at which there is supply of the stock.
On the other hand, if a stock is moving lower, it will meet a price level at which there is support and finds it difficult to move down further. This is the Support Level where there is demand for the stock.
However, at resistance level, if demand for the stock is able to absorb all the supply of the stock, then the overwhelmed demand will break free from the resistance level. A breakout of the resistance would have occurred. After the breakout, the resistance level now acts as the support level if price action retraces back.
The reverse can also happen at the support level where the extreme supply will caused a breakdown of the support level. This broken support level flipped to becomes the support turned resistance level.
As market has memory, these support and resistance levels become critical in our Price Action Trading Chart analysis. They provide the confluence areas of fighting zone between the bulls and the bears. Eventually, one will win and provide the buy or sell signal that price action traders will follow up to take action.
Hence, as price action traders, the key to success lies in finding the critical support and resistance levels in our charts. Below are 3 ways to draw the support and resistance levels in the chart.
1. Horizontal Support and Resistance Levels
2a. Resistance Broken turned Support
2b. Support Broken turned Resistance
3. Dynamic Support & Resistance Zone Between 20EMA & 50EMA
In dynamic support and resistance, we make use of 2 moving averages, the 20 and 50 days exponential moving averages to show us the trend in the charts. For example, in an uptrend where the 20EMA is above the 50EMA, when price pull back into the support zone between the 2 lines, we will be looking for price action signals to enter a trade.
In my free Price Action Trading Course, we teach our traders to trade only in the area of confluence such as the support and resistance levels with price action signals. Sign up for our free course here.