What is a support and a resistance level?
A support level is a price level where the price is likely to turn around after a short or a long move to the downside. A resistance level is a price level where the price has a high chance to change its direction after a short or a long move to the upside. Different types of support and resistance levels exist:
1/ Static support and resistance levels.
2/ Dynamic support and resistance levels.
3/ Psychological support and resistance levels.
Static support levels are earlier support and resistance levels that are below the present price level. Static resistance levels are earlier support and resistance levels that are above the current price level. Both static levels are fixed price levels, and they do not change. A static level drawn on a time frame will remain the same on all other time frames. Traders can always refer back to these static levels in the future, by drawing them on their chart. Static levels are drawn on all time frames. However static levels from the daily, weekly and monthly chart carry more weight than those drawn on the intraday time frames. The higher the time frame, the higher the importance. Yearly chart static levels are more important than quarterly chart static levels and monthly static levels are less important than quarterly static levels.
Dynamic support and resistance levels are moving support and resistance levels. They change constantly over time and are positively correlated to the price. They vary from one time frame to another. Examples of dynamic levels are moving averages, Bollinger bands, Keltner channel, standard error bands, Starc bands, standard deviation bands, moving average envelopes. Dynamic support level becomes a dynamic resistance level when the price drops below it and a dynamic resistance level usually acts as dynamic support level when the price goes above it and finds support. Simple or exponential moving averages such as: ten, twenty, thirty, fifty and two hundreds are commonly used as dynamic levels on all time frames. Similarly to the static levels, the higher the time frame, the higher the importance.
Psychological support and resistance levels are critical static support and resistance levels. These are thin diving lines between the bulls and the bears. Psychological price levels influence traders’ sentiment. When the price is above a psychological price level, the sentiment is bullish, however as soon the price crosses below the psychological price level, the sentiment becomes bearish. These are tough trading areas as the bulls and the bears respect each other Google gsuite territory. When the price is above the psychological price level, the bears do not dare to sell and the price is fully controlled by the bulls but as soon as the price crosses back below the psychological price level, the bulls do not interfere until it crosses back above the psychological price level. A psychological support level is also a psychological resistance level depending on the price. If the price is above the psychological level, the psychological price level becomes a psychological support level and when the price goes below it, it becomes a psychological resistance level. Recently, 8100 and 8300 have been powerful psychological levels for USDJPY currency pair. In reality, price rarely stop at a single price level but can dip below or above a level before turning around. For better “trading” results, it is useful to consider these levels as zones. Instead of static, dynamic, psychological levels, it will be static, dynamic, psychological zones.
Validation of support and resistance levels
In the up trend the price must displays higher lows and higher highs until it fails to display a new higher high. In a down trend, the price must display lower lows and lower highs until it fails to display a new lower low. These are useful and important information for both “day trade“ and “swing trading“. In the up trend, the price must break and exceed the most recent high and display a new higher high to confirm the strength of the bullish momentum. On the other hand, the price must break below the most recent low and display a new lower low to keep up the bearish momentum. Generally, the bullish momentum is weakening when the distance between the most recent high and the new higher high is insignificant. Equally, the bearish momentum is diminishing when the distance between the most recent low and the new lower low is negligible. During a consolidation period, the price is oscillating between one static support level and one static resistance level. A new high in up trend is a resistance level but not yet a valid resistance level. A valid resistance level is a resistance, retested and confirmed by the price. Equally a valid support level is a support, retested and confirmed by the price. A double top or a triple top is a valid resistance level. However a double bottom or triple bottom is a valid support level.
Double top confirms a resistance level. After a new higher high, the price will pull back and will display a new higher low. A new higher low is an invitation card to new bulls so to speak. The bulls responded to the invitation but were not very enthusiastic and serious enough to break the most recent high. The result is a double top chart formation. This is a typical validation. In a down trend, a new lower low is a support level. After a new lower low, the price will rally and will display a new lower high. This new lower high is a kind of bearish invitation card to new bears but as they try to push the price below the most recent low, they fail. The price finds support at the most recent lower low, creating a double bottom chart pattern. As you can see, the most recent lower low which was a support level is retested and validated. A valid price’s level is always retested. If a support or resistance level remains intact, it becomes a valid support or resistance level. Serious traders and investors do not rush into trades. In a down trend, the price is breaking support levels. When a support level breaks, the price will seek a new support level. However at a valid support level, the price will rally and as the trend is down, bears are selling every rally. If they sell but the price fails to display a new lower low and displays instead a double bottom, traders will place stop- buy order fifteen pips above the most recent lower high, with a stop-loss ten pips below the most recent low. Please note that some traders will buy as soon as the trend line breaks to the upside.
Conversely in an up trend, the price is breaking resistance levels. When a resistance level is reached for the first time, the price will pull back, creating a new higher low. New buyers will then enter the market, pushing the price up. If they fail to break above the most recent higher high, the price will display a double top. It is important to understand the anatomy of a double top chart formation. There were sellers who sold the financial instrument when it reaches the most recent high. The pull back into the new lower low is the result of the bearish activities at the most recent high. As the price displays a new higher low, new buyers responded by buying the financial instrument. However as the price continues the movement to the upside, stop sell orders were placed at the most recent high. These sell orders were successfully filled and the price fails to create a new higher high. The validation of a resistance level reveals the bearish pressure and a valid support level confirms bullish activities. Please note that valid support or resistance level is one thing but the entry point is the most important thing. The validation is a signal but not an order to sell or to buy. To avoid careless entry after a double bottom chart formation, a stop-buy order fifteen pips above the most recent lower high and stop-loss ten pips below the most recent low are acceptable. TSTW SYS 08 and TSTW SYS 008 traders will carry out their method.