Candlestick patterns helps a trader to achieve higher profits and reduce his losses. Candlestick patterns along with support and resistance have a higher success ratio.
Support and Resistance
Support and resistance is one of the basic concept of price action. The best way to trade support and resistance, is to buy when the price are at support levels and sell when the prices are at a resistance. This method is one of the most basic and simple strategy of trading .
Support represents the buyers zone. This is a zone in which we could see higher buying interest from the bulls. Support level, supports the prices in a bearish market. In a bearish market, the prices could bounce back from a support level . Sellers are considered strong and active in a downwards market, if they break support levels easily.
Resistance is an inverse to support . This zone represents the sellers zone ,(i.e) more selling can be seen in this zone than buying . These level represents good reversals to trade in a weak bullish market. These levels are easy to understand and this is why it is known as the most basic strategy out there. A Bullish market is considered strong, if the buyers break the resistance levels comfortably .
Support and Resistance alone are not enough to take a trade. But when they are combined with a Candlestick pattern, then the probability of having a winning trade increases exponentially. There are two methods in which people plot support levels. The first method is using pivot points and the second method is identifying a level which the market has respected repeatedly.
Pivot points calculated by taking the average closing price of previous candles. The resistance levels are represented by R, the support levels are represented by S and pivot is represented by P.
In the above Chart, you can see various resistance and support levels. The blue arrow mark on the chart tells us many things .
- The sellers are losing confidence as they were not able to close the prices below pivot levels.
- Reliance industries Makes a higher low when compared to it’s previous low point.
- Smart Buyers see this is a opportunity to enter the Stock again with the risk being too small.
- Next two candles also shows us the same thing as the sellers were losing confidence because they were unable to make a newer low.
- In the Next candles Buyers go full throttle and stop sellers out and drive the stock price higher.
In the Same Chart, we will focus on how Prices behave near the Resistance Levels. Focus on the arrow mark
- Buyers were in full confidence and they broke through R1 resistance levels comfortably and closed the prices above those levels.
- The next Candle is a classical doji candle which signals the possibility of a reversal.
- The doji Candle formed just below the Resistance Levels R2 which should give good confidence while taking a short trade.You can read more about the doji candle over here.
- In the following Candles, bulls turns pale and the sellers kick in and drive the prices below R1.
- A previous Resistance will become support, once the buyers close the prices above those levels comfortably.
- A previous Support will become a resistance once the sellers close the prices below those levels comfortably.
Let us look at a different example, using the same method, with a different time frame .
We will analyze the first arrow mark
- The buyers are aggressive they break through the pivot levels close above the pivot level.
- In the next candle the prices reach till R1 and this level activates the sellers.
- The sellers come in aggressive they drag the prices below the pivot but are unable to close below it.
- then the market becomes choppy and sideways between R1 and pivot.
- Finally the sellers break through the s1 support level but they were not able to break it comfortably.
- Again the market becomes choppy near s1 and pivot.
Now we will analyse the second arrow mark
- They were unable to make a newer low near the support s1 level.
- Then the buyers kick in aggressive and break through the pivot levels comfortably.
- The next candle is a bit tricky as the market opens with a small gap.
- The market moves up breaks R1 reaches almost till R2 and then sellers kick in.
- The sellers start selling aggressively close the candle below R1.
- The buyers give up the sellers drive the prices till support s2 level.
- Some sellers start booking their profits near s2 level and the prices rise.
- The prices rise but they are unable to break above support s2 .
- This is a classical example of a support turning into resistance .
- The prices reach s2 which becomes resistance and the sellers kick in.
Support and resistance represents the important levels for the market. These levels have a tendency to attract smart money which drives the market . A previous support level can also become a resistance level as we saw in the example set No.2 . A previous resistance level can also become a support level as we saw in the example set No.1 . A smart trader would never short a stock near support and will never buy a stock near a resistance.