Hello there, this is tradingpedia.com and this video deals with support and resistance – horizontal support and resistance levels in technical analysis, a concept that fascinated markets for ages, since the stock market in the United States was launched a century ago.
Horizontal Support and Resistance – Overview
Horizontal support and resistance, like the name suggests, forms on the horizontal. The price keeps trying against a horizontal base, it builds energy, until, eventually, breaks higher – this is called resistance. Often, when the market reverses to the same area, resistance turns into support. Previous resistance turns into support. Or, if it breaks lower, then support turns into resistance. This interchangeability between support and resistance is a very important concept in technical analysis.
Support and resistance also take place on a dynamic level, meaning that support and resistance follows the price, meaning that the market may even form a new high or low, depending on the trend, while at support or resistance.
Imagine the price action here, for instance. Let’s assume that the market is rising, and this is a trendline. The trendline represents support and even if the market makes a new high, it still comes at support. And even if it breaks the support in terms of a trendline, if it doesn’t break the series of higher lows, it is still acceptable. This is called dynamic support and the market may break it and even make a new high at resistance – this is called dynamic resistance. Let me show it to you again – this is dynamic support and then support is broken, support turns into resistance, but on a dynamic level. Out of the two situations, dynamic support and resistance levels are more powerful.
The bigger the timeframe, the more important the support and resistance level. If you want, this is a concept of market geometry, but it goes beyond market geometry in the sense that it refers to levels that may still form a high and a low in a rising or a lower trend.
Tips and Tricks
Let’s see some levels. This is the EURUSD on the monthly chart, a timeframe available on any broker. Remember, dynamic resistance and support are much more powerful than horizontal ones. This being the biggest timeframe of all offered to the retail trader, we must consider it moving forward.
If we take a trendline and connect these lows we see that the EURUSD, when it dropped from 1.40 when Mario Draghi came at the help of the ECB, it found support above this trendline. This trendline shows dynamic support. How do we know that? Well, this was support once and the EURUSD was supposed to react at this trendline, to have a difficult time to break it.
This is not a timeframe a trader would like to use, but from the bigger timeframes all we do is we take our support and resistance levels and then on the lower timeframes we trade. If you are short, for instance, on such a pattern on a bigger timeframe, based on a possible rising wedge and the market collapsed, you will want to at least book partial profits on dynamic support on the monthly chart. One might say that support is broken – no, it is not broken. When support is broken, look for the candlesticks to not reach the trendline anymore. Look for some empty space in between. All these candlesticks still touch the support, giving the impression that the market wants to come back. And it did come back.
This was 2015 when, for the first time, the EURUSD reached dynamic support. Then it tested it again ten months later, and again a year-and-a-half later, rejected from support as it was supposed to, and came back to it in 2019. Even in 2020 it was still at the level.
If we look at this area, not only that it was a dynamic support, but the market also reacted to a horizontal support. The market tried at dynamic support and then reversed higher, but somehow remained in contact with the dynamic support. At the same time, it reached horizontal support, reacting at a confluence area. You don’t want to mess with such an area, especially on the monthly chart.
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