See Part I for an overview of price action trading and the different types of charts.
Concept of support and resistance
Resistance is an important level where the available supply tends to exceed the overall demand and this stops prices from increasing any further. In most cases, prices will face huge selling pressure and a sharp downtrend can be expected when the price reaches this zone.
The above figure displays a very strong resistance zone near the 2300 price band.
On the contrary, Support is an important price level where the demand for an asset exceeds the available supply and this stops prices from falling any further. In most cases, the asset may seem undervalued at a key support level, resulting in investors/traders buying into the asset and creating fresh long positions.
The above figure displays a key support/demand zone around the 160 price band and a strong resistance zone near the 360 price band. Watch how the price trend strongly reverses when it enters these important zones.
Concept of trendlines
A trendline is a straight line that connects at least three swing highs or three swing lows and extends towards the future to act as a support or resistance zone. Most properties that are applicable to support and resistance zones can be witnessed at trendlines as well.
The above image shows us a trendline connecting swing highs from the year 2015 to the year 2020. As we can observe, the price was in a downtrend as it formed a series of lower highs and lower lows during the period.
Stay tuned for the next installment of this series to learn how to identify support and resistance using Python.
For additional insight on this topic visit QuantInsti blog: https://blog.quantinsti.com/price-action-trading/.
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