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As we discussed in our introduction to price action, markets are cyclical creatures. Prices go up, prices go down, and all we can hope for as traders is to be slightly ahead on the right side of the wave.
But along the way, traders can draw many conclusions that can put a strategy into the picture, and relative to trends, support and resistance are very important. Bullish trends usually reflect a series of higher highs and higher lows, while bearish trends do the opposite. But – the market doesn’t always trend as we often see ranges or summaries when prices are fairly balanced. That’s why Inside Bars were created, which we’ll discuss later in this submodule.
Recommended by James Stanley
Basics of range trading
Price Action Support and Resistance
As discussed in our education section, there are many ways to find support and resistance levels. Fibonacci is a popular tool, and the psychological level can be important. But if the market doesn’t recognize support or resistance, what’s the point? None of them, are they? The only usefulness of support and resistance is to be able to highlight what is likely to happen while allowing traders to adopt an objective framework for their activity in the market.
As we’ve seen in our price action support and resistance article, there are a few main ways to use previous price action to find actionable levels. But we also concluded that another way traders can look at previous price action to find support and resistance is by combining old levels that may resurface.
Support and Old or Prior Resistance
In an uptrend, prices generally move up and down, and the general trend is flat rather than flowing. When prices fall, traders usually look for the point where it becomes attractive to buy again. A possible reference point – previous swing high or previous resistance point. In the case of a downtrend, previous swing lows or support points act as potential resistance. To illustrate, let’s look at an example of GBP/USD.
Each blue line below represents a previous area of resistance that acted as support. The red line represents the support area that has entered the picture as resistance.
GBP/USD weekly price chart
Chart created by James Stanley; GBP/USD weekly chart, October 2019 – April 2022
Let us understand this situation in more detail using the diagram below. We started with the red vertical line, after which the price action started to swing to the 1.4013 level (marked as “1” in the chart below). You can see multiple wicks in the red box that accompanies this line on the daily chart, which highlights the resistance reaction (labeled “2”) that lasted from early March to the opening of May. This resistance offered a few different twists, but buyers eventually broke through, as indicated by the green box (denoted as a “3”) in early May.
But buyers took a setback at the same level that came into play a few months ago, 1.4243, and after bulls failed to break out, sellers finally took control and settled below 1, with 4013 closing. The bulls pushed down into the purple box near 1.3800, followed by an uptick that sent the price straight back to the same resistance zone (marked “4”).
This bend leads to another new low in the 1.3600 area, but sellers are still not in full control as price returns to the same resistance zone but not quite there. This is a bottom high, indicating that sellers are on the sidelines, unwilling to wait for price to test the high. They came a little earlier, which resulted in lower highs before sellers swing more aggressively (marked as “5”).
GBP/USD Daily Price Chart (2021 – Feb 2022)
Chart created by James Stanley; GBP/USD Daily, Jan 2021 – Mar 2022
After the second resistance reaction (marked “5” above), the sellers pushed the price back to the support level, which was not ready to give way. This happened a few months later.
But, perhaps more importantly, the same area around 1.3600 acts as a huge resistance point in early 2022 trading. The shift is now six months old, but there is still a clear bearish bias, as evidenced by the lower highs. However, pay special attention to how strong the resistance response is in the white box (labeled “6”) on the right side of the chart. It took nearly three weeks to resolve the issue, but when it did, prices sparked a sell-off that lasted for a long time. Along the way, more short-term resistance elements act as support (denoted as “7”) and earlier support elements act as resistance (denoted as “8”). In Box 9, I would like to emphasize lower height construction.
GBP/USD Daily Price Chart (2021 – May 2022)
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