Support and resistance can be a technical analysis indicator that can be the bain or joy of many traders. This is because this indicator can swap roles, and if this concept is not clearly understood, then confusion sets in.
When price moves past (breaks out) support or resistance, more of the asset has now been either bought or sold, depending on the situation. As such, a new zone with this new amount of liquidity has been established, and the effect, when price tries to come back to this point, is reversed.
I will outline and detail the reason why support becomes resistance and vice versa in this article. Many individuals don’t know why this occurs, but the explanation is pretty simple. Read on.
What happens when price moves past support or resistance?
Moving along in the series of our support and resistance course, we come to the aspect of support and resistance and what actually happens to these levels when price breaks past these points.
You should have gone over Part 1 and Part 2 of this tutorial course, and by doing so, you would have seen in the examples I provided that this technical indicator in many scenarios will flip from being support to resistance and then vice versa.
You will have to consider this in your technical analysis; for the most part, it is actually beneficial. This is because when this indicator flips, the process of spotting and plotting these levels becomes easier.
Additionally, you can utilize these levels to your advantage because understanding that this invisible barrier can be implemented from either above or below will help improve your analysis of the markets.
Let’s look at this concept of support and resistance flipping to become the other in more detail, and we’ll try to explain and discuss why this actually happens.
Support becomes resistance, and resistance becomes support
Before we try to understand why this indicator can move (flip) from support to resistance, let’s make sure that we understand how it looks on the charts.
Let’s look at this example of the AUD/NZD. I’ve drawn a support and resistance level on the one-hour chart.
Looking at this example, you can see how the price moves up and down past this level and then comes back to retest it on multiple occasions, either from above or below. A lot of the time, when it does, this level is respected.
I chose this example because it is not clear-cut, although you can clearly tell that the level I have established is an obvious one of support and resistance.
To establish this level, I chose to plot the line whereby it would give me the most touches (I considered both bodies and wicks), but it would still be relative to both sides. This means I would not favor drawing the line closer to resistance or to support, but rather between them. Thus, theoretically, this level would represent the middle of the range between support and resistance.
If you are unable to see the points I have picked out; I have marked these points out with arrows in the picture below.
Depending on how you want to draw your levels of support and resistance, you can opt to use a bar to indicate the range, or you can choose to plot a line as I did. However, always keep in mind that 95% of the time, if not more, support and resistance levels will be a price range and not one specific point.
Do not worry if you do not know how to draw these levels precisely; I will discuss and show you how to do so with a complete breakdown in Part 8 of this tutorial course. Part 8 of this course will also consider the candle bodies and wicks, helping you understand how to better plot your support and resistance levels.
If you are still a little confused, it will help if you remember that in the previous tutorial, I explained that support and resistance levels are not one specific price point, but rather, they will be a range. Thus, the price will sometimes move within this range or even slightly past it but will rebound back if it is a support or resistance level.
Other factors can also contribute to price moving slightly past these levels, such as bull and bear traps, but that is an article and a concept left for another day. Also, take into consideration (on a lesser scale than a bull and bear trap) that other retail traders and financial institutions can also see these levels and will push prices just past these levels to build up liquidity (stopping out other traders), so they can drive the price in the direction they want it to go.
Thus, once again, you will need to use your eye and logic to firmly establish whether or not the area in question is a support and resistance level and moreover, is it a major or minor level. This will play a role in your analysis and, eventually, the decision of when and where you will enter the market for a trade.
The key takeaways are;
- Use your eye and logic to find a price point or area where price has been respected both from above and below
- Consider that the markets will rarely ever be clear-cut, so you will have to decide based on other factors, including technical analysis, your thinking, and perception, whether or not a level you establish is truly a support or resistance level.
Why does support become resistance and resistance become support?
If you read Part 1 of this tutorial course, you will understand that the human psyche (subjective factors) and objective factors play a role in determining these levels. I never really touched on objective factors, but some of them could include the number of physical assets a company has or a business deal potentially generating increased revenue.
However, when it comes to supporting and resistance swapping roles, the factor to consider is the amount of liquidty (volume) that is being traded at that price point.
I explained in Part 1 that these levels occur because traders and financial institutions have either bought or sold a huge amount of the asset at this price point. Thus, breaking past this range will take an even larger amount.
When support or resistance is broken, more of the asset is being bought or sold depending on the position of the level (the situation). As such, there are now more of those traders holding that asset moving in the opposite direction, meaning they have overtaken that level to a degree.
Then, even more, traders see the price breaking away and jump into the trade, hoping that the price will break even further.
As such, you now have more traders and/or financial institutions holding more of the asset going in the opposite direction.
As you can imagine, when price comes either back down or up (depending on the situation), all these investors have liquidity built up at this newly established range where price broke past (either support or resistance). Then the effect is reversed.
This means they will attempt to keep price from moving past this point so they do not get stopped out of the trade. Thus a new (opposite) support or resistance level is established, and trading continues until this happens again.
You can think of this as a seesaw effect. I am generalizing and broadening this to a degree, but hopefully, you get the picture.
Considering this effect on various time frames
You may have noticed in the example of the AUD/NZD that this seesaw effect of support and resistance swapping is quite volatile. Below is the chart again for ease of use.
However, you will have to consider that this is on the 1-hour time frame. It will help if you remember that when I discussed major and minor support and resistance levels, major levels could be established easily on higher time frames like the daily and weekly charts.
This is because these charts depict an enormous amount of trading throughout the day or days. The amount of volume over this time period is tremendous; thus, when these levels are established, they are typically respected.
Look at the example of the EUR/CAD on the daily chart. You can see that the swapping of support and resistance levels is much less erratic.
Resistance was finally broken in March of 2020 due to a massive increase in buying volume. Then from April to September of 2021, price could not break past support until there was an influx of selling. Support then once again turned to resistance and was halted in December of 2021 and February of 2022.
If we have to think about our AUD/NZD example on the 1-hour chart, we can understand that during the hours of day trading, the volume that is being traded is shared amongst both bulls and bears. It is only at the end of the day that we understand if the entire day was bullish or bearish.
Hence, the lower down on the time frames you go; the more volatile the support and resistance levels will be. This is another factor you should consider in your analysis when establishing support and resistance on various time frames.
The key takeaways are;
- Support swaps to resistance and vice versa because the asset has had an influx of trades moving in the opposite direction.
- More of the asset is now held in that position. When price tries to return to that threshold, the same effect occurs (the level is respected because of the amount of asset being held), effectively swapping the role of support and resistance.
- Support and resistance levels will be more volatile on lower time frames.
Support and resistance Part 3 summary
By now, you should clearly understand what support and resistance is if you have read Parts 1, 2, and 3 of this tutorial course. You should be able to identify these price points and understand why and how they are established.
These first three tutorials cover the basis of understanding what you will need to drill into your head in order to get a solid foundation of what support and resistance is when it comes to technical analysis and trying to read the markets.
Take a look at the video tutorial for this section by one of our other traders. Please remember that if you like the content, then subscribe to our YouTube channel.
Additionally, you can view this entire course in video format on our YouTube channel here.
