Top Techniques for Defining Support and Resistance Areas

All traders strive to buy when prices are cheap and sell when they are rich. Bulls/buyers play the long side and search for support areas; bears/shorts favor the sell side and seek resistance areas. The choice to be a bull or bear varies for all traders. History helps to determine support and resistance zones. An ideal trade occurs when we catch a trend early and exit when it is exhausted. Traders endeavor to sell at a premium and buy when prices are cheap. Perfect entry and exit are the dream but rarely the reality.

Price Patterns

Finding ideal trade location is one of the most difficult tasks for traders. To hone your ability to pick off extreme highs and lows of a trend, refer to recent history. Chart patterns repeat in all markets and time frames. Markets tend to stall and reverse after retesting previous high-volume areas. In graphs, high-volume zones frequently take the shape of triangles (pennants) and rectangles (flags). They are also known as congestion or consolidation zones. Therefore, we must identify a high-volume area. A reversal in direction frequently occurs when retesting previous acceleration points, so we must identify those as well.

High-Volume Zone Patterns

High-volume zones take shape before and after extraordinary vertical moves or trends. Implied volatility tends to decline while these consolidation patterns take shape. When a market retests the top of an old flag formation, it provides a support area. When price rises enough to retest the bottom of a flag or rectangle shape, it typically provides a resistance area. The pennant formation has an apex (see chart below). Apexes are often solid support/resistance when retested. Train your eye to identify these shapes. Your trade location will improve and subsequently so will profits if you use these patterns for entering and exiting positions. 

Acceleration Points

An extreme (sup/res) is often made when a market tests a previous acceleration point. When a market breaks out of consolidation phase the move is often violent with an increase in volume. Breakout candlesticks typically have a long body with short to no wicks. The chart below shows examples of the congestion patterns. Note when a pre-pandemic flag was revisited a reversal occurred, leading to month of choppy trendless trade. Also, note the congestion pattern in the middle of the graph. The breakout began at the apex of the triangle with a long-bodied green candle. Many trends begin this way.

Double Tops and Bottoms

Support areas often form when a previous extreme low is tested. This is called a double bottom pattern and a sample is shown in the chart above. Conversely, a double top occurs when an old extreme high is retested.

History Helps

When searching for optimal entry and exit levels, history can be a great help. Tracking old highs and lows and congestion patterns (flags and pennants) is a good start.  A little charting homework will improve trade location thus increasing profit potential while reducing risk.

John Seguin, Market Taker Mentoring

Trader Education