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In the previous lessons, you’ve learned about trading support and resistance.

Let’s review what you’ve learned.

When the market moves up and then pulls back, the highest point reached before it pulls back is now resistance.

As the market continues up again, the lowest point reached before it climbs back up is now support.

Support and Resistance are Zones

One thing to remember is that support and resistance levels are usually not exact numbers.

To help you filter out these false breakouts, you should think of support and resistance more of as “zones” rather than concrete numbers.

One way to help you find these zones is to plot support and resistance on a line chart rather than a candlestick chart.

Support and Resistance Can Reverse Roles

Another thing to remember is that when price passes through a resistance level, that resistance could potentially become support.

Resistance Turned Support

The same could also happen with a support level. If a support level is broken, it could potentially become a resistance level

Support Turned Resistance

This concept is known as “role reversal“.

Trend Lines

In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (valleys).

Ascending Trend Line

In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (peaks).

Descending Trend Line

There are three types of trends:

  1. Uptrend (higher lows)
  2. Downtrend (lower highs)
  3. Sideways trends (ranging or flat)

Trend Channels

There are three types of trend channels:

  1. Ascending channel (higher highs and higher lows)
  2. Descending channel (lower highers and lower lows)
  3. Horizontal channel (ranging)

To create an up (ascending) channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to a position where it touches the most recent peak.

Ascending Channel

 

To create a down (descending) channel, simply draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley.

Descending Channel

To create a sideways (horizontal) channel, simply draw a parallel line at a zero or flat angle.

How to Trade Support and Resistance

Trading support and resistance levels can be divided into two methods

  1. The “bounce”
  2. The “break”

When trading the bounce we want to tilt the odds in our favor and find some sort of confirmation that the support or resistance will hold.

Instead of simply buying or selling right off the bat, wait for it to bounce first before entering.

Falling Knife

By doing this, you avoid those moments where price moves so fast that it slices through support and resistance levels like a knife slicing through warm butter.

Or your warm hand.

As for trading the break, there is an aggressive way and there is a conservative way.

In the aggressive way, you simply buy or sell whenever the price passes through a support or resistance zone with ease.

Aggressive way of trading a break of support or resistance

In the conservative way, you wait for the price to make a “pullback” to the broken support or resistance level and enter after price bounces.

Conservative way of trading a break of support or resistance