Let’s begin with a simple question. What do you do when the market is at a support or resistance level? Most traders would buy at support and sell at resistance. This is the standard way of doing it. While, Pro Price Action traders, on the other hand, sometimes buy at resistance and sell at support as well.
You might have observed that the market sometimes does not hold at the support or resistance, and breaks above/below these levels. Also, after breaking these levels, the market usually makes a drastic move. Ever wondered why this happens? Well, the question can be answered only if you have an understanding of the price action in the market.
What exactly are support and resistance levels?
Before getting into fine details of the topic, let’s first discuss some basics.
Resistance: In technical terms, it is the area where the sellers are keen on selling the currency. If we were to look at it psychologically, resistance means memory. For example, let’s say the market is in an uptrend, and during the uptrend, the market falls severely. Now, this sudden change in the direction is in the eyes of the public. So, the next time when the price comes to the area where the market dropped, people don’t buy there because they remember what had happened the last time. In fact, some get in on the sell-side as well. And since, there is more supply than demand in that region, the market drops down. Hence, making this region a resistance level.
Support: Support is that region of the market where the buyers are interested in going long. Here too, the logic remains the same. However, let’s comprehend it in a different way. Let’s say the market is in a downtrend. As the market keeps making lower lows and lower highs, all of a sudden, the market shoots up. What could this mean? It means that the sellers are not interested in selling at that price, or the buyers are desperate on buying at that price. Therefore, the area around that price becomes support.
Understand buyers and sellers strength
The key to price action trader’s success lies in understanding the strength of both parties. Many traders trade based only on the design of the candle, while a price action trader, adds momentum to their candlestick analysis.
Not all support and resistance levels will work in your favour. There are other factors that go into it, as well. And, momentum is one of those factors. So, let’s understand the role of momentum in support and resistance with an example.
In the below chart we can clearly see the market is in a downtrend. The orange line represents the support and resistance. We can see that the buyers start to show up from point 1. The buyers go up, pullback a little, and then go straight up to the S&R area. When the price reaches up there, the market slows down, and a red candle appears in the end. This confirms the presence of the sellers in the market. Therefore, we can go for the sell.
Well, what do we see in the chart? The market shot up north right after we entered for the sell. The market went completely opposite of what we expected.
Let’s do the post-analysis for the trade. Firstly, the market started off its down move by breaking the support (orange line). It went down to point 1 and then began to hold. If we were to observe the strength of the seller when the market was dropping, initially it came down swiftly, and then it began to slow down, indicating that the sellers are weakening.
Now, when the pullback started to kick in, the buyers took off quite aggressively. And, after a shallow retracement, the buyers blasted up much stronger than before. What does this tell you about the buyers? This evidently tells us that the buyers are getting stronger every step of their way. Also, the buyers were supposed to slow down, as, they were approaching the sellers’ area (S&R), but, they didn’t. In fact, they got stronger.
After the second big move of the buyers, a red candle appeared. If you compare the buyers and the sellers, left to right, who seems to be stronger? Without a doubt, the buyers seem to be stronger. And, the red candle is just a pullback for the buyers to take the market higher.
Hence, we can conclude that the momentum of the buyers and sellers can change the whole perspective of the market.
Entering the Trade Along with the Big Players
The market movers, which we refer as the big players, are the first ones to enter the market before the massive move happens. Along with the big players, there are some price action traders who enter close to the big players as well. So, let’s discuss one of the techniques to read the markets such that our entry is as precise as the big players.
- Above is the chart of NZD/CAD on the 4H timeframe. The market broke the S&R (orange line), indicating that the buyers are in control of the market.
- After breaking the S&R, we can see that the buyers went up quite weak. In other words, it took many candles to reach up to the green line.
- Now, when the pullback began, we can see that the sellers shot down pretty hard, indicating the seller’s presence in a buyer’s market.
- Later, the buyers went up again from the S&R but were unable to make a higher high. And from the resistance, the sellers brought the market down aggressively.
- The same incident occurred yet again. That is, the market went up until the resistance and fell down to the S&R very strongly. This implies that the sellers are picking up pace every step of their way.
- The third time when the market came to the S&R, the buyers were so impotent that they weren’t able to go until the resistance as well. This means that the buyers are not interested anymore in buying from the S&R area. Also, the sellers appear to be pretty strong at the moment.
- Therefore, with a distinct understanding of all this information, we can prepare to go short from the S&R.
The result of the trade is as shown below.
The momentum of the market plays the most vital role in trading. Also, the concept of buying at support and selling at resistance cannot always hold true. Moreover, from the above trade, we also saw how the big players enter the market at the very beginning of the big move. Hence, the closer you can get to the big players’ entry point, the better the trader you can be.