Former Resistance/Support Becoming Support/Resistance

This is a classical market geometry technical analysis example and the reason for that stays with the fact that simple things work best.

Using the Panel – Left and Right Chart

The whole concept is based on the free information one has on the left side of the chart and this free information is to be used on forecasting important entry levels on the right side of the chart to identify places to place trade.

The price moves in waves, or steps, and levels that offered resistance in the past and in the end price managed to overcome them are the levels most likely to offer support in the future.

The same is valid for the other way around, with the mentioning that in this situation the support is turning into resistance. Now, this information is important as those areas are the level at which one should buy BUT contracts or CALL options (in a support area) or put options (in a resistance area).

Market Geometry in Forex Trading

The two videos with this educational article deal with the USDCAD and show exactly how to look for this market geometry aspect and, more importantly, when these levels are considered broken or not -> so if a support should turn into a resistance level or not.

Market geometry field is an extremely vast one and only by looking at the whole picture one can find the perfect place for trading. This is what makes the difference between a losing and a winning trade and market geometry provides clues where to find the best places where market is most likely to hesitate.

After all, trading is a game of probabilities and this is what a trader is doing: taking a chance into one specific direction when the odds for the trade to go in his/her favor are the best.

Identifying Stronger Support/Resistance Areas

One way to identify stronger support/resistance areas is to look on the bigger time frames and then take the levels from the bigger time frames and look at the lower ones. By the time price comes into that level then its time to place a trade.

In Elliott Waves Theory, when trading a triangle for example, it is expected most of the times that the b-d trend line of the triangle to be re-tested after the break and this is a clue regarding what type of the triangle market formed and what to expect next. Therefore, if the triangle is forming on the four hours chart for example, then after the 2-4 trend line break one can go on the hourly and five minutes time frame and wait for the retracement.

Finding the Perfect Entry Price With a Bullish Triangle

In the example above, if the triangle is a bullish one, or an ascending one (make sure you check the Ascending Triangle article in our Forex Trading Academy), then buying a call option on a retest of the b-d trend line is the thing to do and the expiration date, if the retest is being seen on the five minutes chart, can be even a small one. Usually such triangles that are being retested appear as X waves in complex correction so the upside, in our example, should be unlimited.

And just like that, a pattern, like the triangle above, is giving us the perfect entry place for a successful trade as what it was supposed to be a strong resistance (the breaking of the b-d trend line) is turning out to be a support on the retest and gives a trader the strike price.

Other Patterns That Can be Used to Identify Support/Resistance Areas

However, not only patterns in the Elliott Waves are suitable for breaking and retesting, as also a head and shoulders neckline is retested most of the times and by the time the retest is coming, one should place a SELL order or a put option in the classical head and shoulders pattern or a BUY order/CALL option if the head and shoulders pattern is an inverted one.

Another pattern that shows price struggling to break a support/resistance and then coming back to the level is the wedge, and in a rising wedge one should look for a retest of the 2-4 trend line by the time it is retested, while on a falling wedge the same 2-4 trend line should be retested after the break. The only difference is that in the first case one should look to buy put options, as a rising wedge is a bearish pattern, while on the later one should look for buying call options after a bullish pattern.

Multiple Tests of Support / Resistance Levels

It is possible also that market is making multiple testing in a strong support/resistance area and this multiple testing is showing different things to the experienced trader. For example, multiple testing in a rising or a falling channel it is showing nothing but the possibility for market to form a double or a triple zigzag, namely a zigzag family pattern. Knowing that, and also knowing that these are corrective patterns, lead to the logical conclusion that put options should be looking into multiple retesting of the rising trend line in a rising channel, while call options are indicated if the situation is opposite.

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