Introduction to Technical Analysis Part II: S/R-Flips

How do you enter a trade safely? Every new trader knows the situation. He sees a green candle, goes long and price retraces. The new trader exits the trade but then price continues higher.

Price seems to interact with certain levels. It touches a level several times before and after passing it. Obviously this would be a good spot to enter a trade. What are these levels?

 

 

Support and Resistance

If a level stands out, like a swing high or a swing low, when price returns there, it usually reacts with that level. A level like that is called support (if price approaches from the top) or resistance (if price approaches from down below). If a level is touched more than once it becomes more and more obvious. Orders start piling up around that level and price will react more heavily if it returns. If a level is touched from one side multiple times these orders get eaten up every time price comes there and eventually all orders are gone and price will break through that support- or resistance-level.

 

Break Out and Retest

Now the last weeks we have seen many Alts being in some kind of consolidation-patterns. Well defined channels with resistance above and support below being touched multiple times. So if price breaks one of these levels it usually will not march right trough. It will retrace and “retest” the important level that he breached, the level that defined the consolidation channel. This move is called a S/R-flip. Support is flipped into resistance or vice versa. If the tested level holds, this retest is usually a good spot to enter a trade with a nice risk-reward-ratio. If a level is breached a trader can put his orders on the level that was breached and the stop-loss-order right below.

S/R-Flip explained

 

Example

So what you want to look for: You are looking for obvious levels that price touched multiple times. In a lot of cases you have a sideways consolidation with price moving in a well defined channel. If price breaks out of this channel you look for a retrace to that level to enter the trade.

One of dozens of example of the last weeks:

Icon ICX breaking out flipping resistance to support and retesting the level

 

After breaking the well defined level of resistance Icon retests that level and flips it into support. That retest is a good spot to enter a trade with stop loss right below the level. Note that price broke through support to the downside, but when retesting it broke through again and went back into the channel.

 

Always remember: wait for setups with good R/R. More importantly than making gains is not to make losses. Trade safely.

 

 

This article was written by the High Frequency Tulip Trading Bot

 

Header: Ondřej Langr CC BY-SA 3.0

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