What is Support and Resistance
Support and Resistance, also known as "structural points", are key price zones that are visible when there are two, or more, repeat points of price movement such as the price bouncing off twice in the picture above. Usually, the point above the current price is called the Resistance area, and the point below the current price is called the Support area. As shown in the figure above, the current market price is $ 3586.5, with the resistance area above the green dotted line and the support area below. If the Support is broken, it will probably become the new Resistance; on the contrary, if the Resistance is broken, it will probably become the new Support.
How to Judge a Breakthrough
A Breakthrough refers to the price breaking through the Support or Resistance up or down after running for a period of time in that interval and no longer returning to the previous price range. When the breakthrough occurs, it will in most cases be accompanied by a rebound to retest the market trend. As shown above, once the support is broken, a trader may go short with a risk/reward ratio set to 1: 2.1.
How to Judge a Fake Breakthrough
A price upside breakout usually shows that after the support breaks, it is pulled back and followed by a strong rebound. As shown in the figure, it is a fake breakthrough. The false breakthrough indicates that the new resistance formed (previous support) at that time was strong enough. Although the market was trying to break through, it was not strong enough. Instead, it formed a strong rebound and went back under the new resistance. When spotting such a pattern, a trader can choose to short and remember to set a stop loss.
Q: How to judge key Support and Resistance？
A: As shown in the figure below, the market has three high points, connect the three high points and making a horizontal extension. The line formed at this time is the key resistance line. On the contrary, if there are multiple high and low points in a consolidation range, even on the same horizontal line, the support and resistance thus formed are not the key support & resistance that the trader needs to focus on. This area is usually called the chip area or the price on the field. As it is relatively confusing and easily prone to breakthroughs, it is not a point that traders should to focus on when looking to set up a trade.
Q: Can I make an order after a fake breakthrough?
A: As shown in the figure, it is a fake breakthrough market. You can try to make an order, place the stop loss high, and the target profit in the next support position.