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An Old Theory about Support/Resistance

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In price action trading, traders rely on support/resistance a lot. Beginners often ask a question of whether they are predetermined. In answer to this, they are predetermined to some extent. A trader can guess level/levels that may work as support/resistance. The idea is simple. Support becomes resistance, and resistance becomes support. In today’s lesson, we are going to demonstrate an example of this.

The price has a bounce at the drawn level and heads towards the North. The last candle comes out as a bearish engulfing candle. The price may head towards the South. If that happens, the sellers are to wait for a breakout at the drawn level. Let us proceed to find out what happens next.

The next candle comes out as a bearish candle as well. However, it does not make a breakout. This is an interesting chart for both the buyers and the sellers. The buyers may wait to get a bullish reversal. Since this is the level where the price has bounce earlier, this may become double bottom support. On the contrary, if the price makes a bearish breakout at the drawn level, the sellers dominate in the pair.

The bear wins. The last candle closes well below the drawn level. This is an explicit breakout. The sellers are to wait for the breakout confirmation. If the chart produces another bearish candle closing below the last candle, the price may find its next resistance at another significant level. In most cases, the price usually goes back and finds its resistance at the breakout level, which was the level of support earlier.

Look at the chart. The price goes back to the breakout level and creates a doji candle. Do you notice the doji candle is produced right at the drawn level? This means the level may drive the price towards the South by being the level of resistance.

The level produces a bearish engulfing candle closing below consolidation support (This may become resistance later as well). The last candle suggests that the price may head towards the South with good bearish momentum. The sellers have found the new resistance.

As expected, the price heads towards the South for one more candle. It usually happens when support/resistance produces an engulfing candle as a reversal candle. In the end, a level of support flips and becomes a level of resistance. If we closely observe, we find this is what happens almost every time. Support becomes resistance, and vice versa. By obeying the theory, experienced traders spot out the levels of support/resistance well ahead.

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