Last updated on April 26th, 2017
I mentioned in another trading tips post that a “that’s different” look to the price action on your charts can set you up for some great trading opportunities.
In a nutshell, a move that is different from the action that came before it is a clue that for whatever reason, renewed interest in the instrument you are looking at, has occurred.
This can set you up with a trend move or a mean reversion trade.
Regardless of which it is, looking for moves that are different especially when trading support and resistance areas is not a bad way to get set to make a trade.
Support & Resistance Are Zones
One area people look for moves is around zones that may be considered potential support and resistance. The logic is that the price zone turned price before (meaning stops can also be tucked behind the price turns) and people expect a repeat.
I’ve mentioned support and resistance before but basically I look for obvious areas as “hidden areas” don’t really attract the masses. You can also expand your thinking to include ranges that have prices moving back and forth between the support/resistance extremes.
The question you should always be asking is will these support and resistance zones hold price or will they fail and either keep moving or simply expand the range?
Of course we can never know with 100% certainty but there is a rather simple way to be clued into where the probabilities are at these extremes.
What would you expect to happen to price if a support or resistance zone was going to hold? I would expect price to move away soon after testing the zone.
Side-note: “Soon” is relative to the time frame.
This chart is a daily chart of an instrument and we’ve been in an uptrend on this time frame for about two months. We have been in a range where the support and resistance zone has been defined due to the areas of price rejection. Context maters and you should know the higher time frame is also in an uptrend.
1. Shows a sound rejection of the lows of the range. While the recent past has shown tests of the lows, this test leaves no mistake that buyers stepped in quite strongly at this point. I find these types of rejections to be a “that’s different” than I’ve seen in the previous price action.
2. We did see an expansion of the range marked with the green arrow and while not perfectly visible, the candle labelled 2 has a closing price at the same level as the previous resistance zone.
Even more telling, even though there was an expansion, the candle was certainly in line with the other green candles and the solid red candle solidly ended that bulls run at that point.
Zoom In On The Zone
This chart is a lower time frame of the same area and a day before the strong rejection of price from the support zone. The horizontal line indicates the area that was acting as support and you can see with the aid of the black line how forcefully price pulls away from that area.
You can see:
A. Test of the support zone, price pulls away.
B. Price breaks lower and is turned away
C. One more test and as indicated by the line, price sharply turns.
Remember the green candle that expanded the range?
Here is an inside look of that day.
FR is the former resistance and as price breaks that:
A. Price sharply turns from the new high
B. Indicates the retest and sharp rejection at new high
Not shown on this chart but price ranges with little interest the rest of the day and it rapidly dropped the following day printing a beautiful momentum candle.
Support Break-Out Traps Shorts
Do you think the strong momentum to the downside enticed those that trade breakouts?
Price expands the range and then drops the following day to the bottom of the range with an obvious momentum candle. Breakout traders read that has bear strength and are waiting for price to slam out the bottom of the range.
As we saw in the first chart, they were disappointed as price does break the zone but strongly rejects at lower prices trapping short traders and forcing them to exit that helps propel price back to the resistance zone of the range.
What happens when price returns to resistance?
Looking back at the first chart and the number two candle, we see price break to new high, reject but holds at the close of the previous candle in what many call a doji candle.
Taking a micro view of that daily doji:
A. Breaks back below the previous close to the previous resistance zone and is soundly rejected.
B. After making a high, price pulls back to the previous close and as shown by the black line, chops around on top of resistance.
Can there be any doubt that price will rocket the next day?
There can be a lot of doubt but in trading, we think in probabilities. The price action highlighted by the black line shows that rejections of levels usually results in price moving away soon after arrival.
When the probabilities of the test being successful increases, we generally see price consolidating at the extreme. The last chart showed something even better and that was the sharp rejection away from the longer held resistance zone when price dipped back inside.
We also never saw price move too far way from the support zone when that zone broke and that should be a heads up as well.
The trading chart tells the story and unfolding price action around key areas of the chart can alert you to the probability of one thing happening over another. As hundreds of hours in front of the charts pass you by, you will see the weak and the strong play out and will begin to hopefully be able to plan trades off the probability of X over Y happening.
Start today by marking off obvious areas of support and resistance and then drill down to the price action around those levels. Experience is always the best teacher.
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