We need a prior understanding of the Japanese candlestick pattern before we discuss this lesson.
What is resistance level?
The major prices at which buyers have already entered the market in adequate quantity and they pause to reverse the price movement.
The traders make use of these price levels to analyze the likely entry of buyers again into the market.
How can we analyze?
This can be analyzed on price charts with horizontal lines where there is pause in price at the same level again and again.
When the price moves higher, it will certainly hit a ceiling. This is the point at which the price pauses and reverses.
The chart below is an illustration.
The sellers enter the market and overpower the buyers. The price is stopped from going further high.
When the price moves, higher and hits the ceiling again and again at the same level. A point at which the price pauses and reverses is known as resistance.
This helps in analyzing a resistance level where the price is likely to pause under selling pressure.
If the price returns to a previously established resistance level, sellers may enter the market. This causes the price to pause and reverse.
Resistance levels enable to enter into new short positions or as a profit target level to close existing long position
How do we identify resistance levels?
We need to observe where the price repeatedly pauses in the same place. The buyers enter the market in this place.
The illustration below shows that by placing a horizontal line where the price seems to pause, it assists us to find a resistance level where sellers are entering the market and stopping the price.
Exercise: Find the correctly drawn resistance levels. Show exercise
The chart above is an illustration using the bodies of the candles for the resistance line.
There is no definite method in placing support and resistance. The suitable method and strategy has to be adopted by the trader.
Support and resistance zones
Support and resistance levels cannot be settled correctly with a single line. It is better to establish a zone.
The illustration above depicts that the price confronts resistance many times at different levels.
Applications with support and resistance:
As these levels are subjective in nature, the point of view of traders may differ regarding these levels.
Although we come across several support and resistance levels expecting the price to reverse, choosing the right ones comes is based on experience.
Number 1: Price finds resistance
Number 2: Price broke through resistance level, but did not stay above.
How to avoid false breakouts?
Long trade: Once the price has broken through a resistance level, wait until the previously established resistance level is shown to hold as support.
Short trade: Once the support level has broken, wait until the support has held as resistance.
An overview of the lesson discussed so far….
At the support level, there are adequate buyers to stop the price from falling further and reverse the price to the upside.
At the resistance level, there are adequate sellers to stop the price from rising further and reverse the price to the downside.
Place horizontal lines on a chart where the price seems to stop repeatedly to find the support and resistance levels.
When our approach is stable, we can use the wicks or the bodies of the candlesticks to draw support and resistance.
Support can become resistance and resistance can become support.
We need to be careful to avoid false breakouts.
The price may pretend to break through support or resistance, but will reverse again in the opposite direction