How to Profit From a Support/Resistance Shield Wall: 3 Strategies

But what causes the price to pivot and change direction? In this section, you will learn about the psychology of support and resistance levels, what they mean, and how they work.

From now on, to better understand technical analysis concepts, tools, and patterns, we’ll put ourselves in the shoes of the soldiers in each army. We’ll start by taking a look at what a Resistance line looks like. To do that, let’s side with the bullish army. You march upward, pushing the price high until the bears’ shield wall, the resistance line, is visible.

Unlike bulls, bears fight to drop the price down – so in this case, they are your opponents. Weapons at hand, bulls hit the shields one after the other, but the line holds firm. With each failed bull attempt, bulls must retreat, regroup, prepare for another attack, and then charge forward again.

There can be only one of two outcomes: either the bears slip and bulls prevail, or the line stands firm and repels any bullish effort. Now that you have a visualization of the resistance line, let’s snap back to reality. When most market participants think positively about a stock or an asset, the price moves upward with more buy pressure coming to the market.

With high hopes for an asset comes high demand, thus increasing the price. However, as prices go up, more and more sellers are drawn in. More sellers bring more supply, and more supply eventually takes its toll on the price. The upward movement goes on until the supply and demand balance out. When the supply eventually outgrows the demand, the price pivots, forming a peak.

When two or more peaks line up horizontally, a resistance line forms. That raises the question: why do these lines form? Why do so many bears consider a price fit to sell? Well, my dear audience, there are several factors at play. One of them is historical data.

If the asset price has reacted negatively to a certain price in the past, it is likely to react similarly if it reaches that price range again. Look at the Ethereum Classic (ETC/USDT) chart below; you can see the bears repelling the bulls’ attack at around the price of $23 three times! This shows that the resistance level is strong.

You might ask yourself why I’ve said “resistance level” instead of “resistance line”; that’s one good question. The resistance level is more accurate since it’s not a single price that repels the upward price movement; rather, it’s the price range that does so. So, addressing the shield wall price as a resistance zone or resistance level is more accurate.

Now that we know what a resistance shield wall is, it is time to switch sides and attack the bulls’ shield wall, the support zone. The support zone is not much different from our earlier scenario; it’s the reverse of the previous battle. All the same rules apply; the only difference is the direction of the battle. Take a look at the Avalanche (AVAX/USDT) chart.

Now that you know what support/resistance zones are, you must learn to identify reliable support/resistance zones and predict price reactions to them. Make sure to read the next section carefully and take notes of the key takeaways.

Professionals also consider prior market prices as well as chart and candlestick patterns, which help inform reasonable expectations of direction and strength. This section will dive into the technical tools and patterns we can use to find valid support or resistance zones.

Previously, I mentioned that each candlestick is like a battle report to a larger war. You can utilize these battle reports to find firm shield wall formations. For example, when a Shooting Star candlestick pattern forms at the market top, the tall upper shadow signifies a resistance zone. The same applies to a Gravestone Doji’s tall upper shadow.

On the other hand, when bears are on the offense and bulls are on the defense, the Hammer pattern or Dragonfly Doji tall lower shadow shows a support zone. I will expand upon this topic later in this article.

Morning and Evening Star, Bullish and Bearish Engulfing, Abandoned Baby, Piercing line, Dark Cloud Cover, and Harami patterns are other critical patterns that can possibly indicate support/resistance lines.

If you are interested, you can find more detail on each in my last Candlestick Patterns article. You should also keep an eye out for classic reversal patterns, such as Double top/bottom, Head and Shoulders, Rounding top/bottom, etc. These patterns are significant when they form close to historically important support/resistance zones.

Such patterns, either alone or combined with candlestick patterns, improve the shield wall defenses and increase the chances of repelling an attack (a reversal). Moreover, other technical tools can also aid you when searching for support/resistance zones. Technical indicators are especially useful.

Tools like the Moving Average (MA), Fibonacci, Zig Zag, and Fractal indicators are widely used to identify key support/resistance zones. Using the aforementioned tools and patterns can assist you in finding both Static and Dynamic support/resistance zones.

Keep in mind that the support/resistance shield wall is either static or dynamic. There is no need to panic though; you already know the static zones. They are the horizontal lines of defense. The Dynamic zones, on the other hand, require more exploring. Let’s join the Bulls’ army once more to see how they work.

In this scenario, the bears have failed to keep the price upward momentum at bay; therefore, you and other bulls are pushing the price high in an upward trend. Although you are beating the sellers in the overall war, bears might win occasionally and force you to retreat and regroup for another assault.

Since you are winning, and you keep pushing the price higher into the enemy territory, each downward movement (retreat) becomes higher than the last. In trading terms, these are called Higher Lows (HL). When these following higher lows line up, it forms a dynamic support line. You can visualize it as the bulls’ advancing shield wall that they retreat to each time a bearish victory happens.

As you can see in the Bitcoin (BTC/USDT), these zones can be in the form of a trend line, and these trend lines can help us in other parts of technical analysis (such as in classic patterns like the Bump-and-Run Reversal pattern and the Fan Principle pattern.)

The trend lines are an essential part of these patterns. Don’t worry; you may not have heard of these patterns or even don’t know what a classical pattern is, but I will explain all these patterns in future articles. Now that we have the basics down, I will ask the million-dollar question: how should you draw reliable support/resistance levels?

Drawing Support/Resistance levels

Do you still have your pen and paper? Good, because you’ll want to take notes on this section. To locate a resistance zone, first, you must look for a price range with a negative impact on the price. Round numbers and historical price zones are the two top candidates for strong price ranges.

When the price reaches such a price range, major pivot points form and change the direction of upward movement to downward. An eye-catching characteristic of strong resistance zones is the number of times the price has pivoted in that range.

But how can we actually select a range as a resistance zone? Well, to do so, you must look for the tallest upper shadow in the identified price range. Then, select the highest point of the upper shadow as the zone’s upper edge and drag the lower edge down until it hits the highest body.

Remember that this candle body might not belong to the same candle as the shadow. A resistance line rarely includes a candle’s body. The rectangle we’ve drawn shows the resistance zone, but we still need to make sure of the resistance’s reliability and strength.

Keep in mind that pivot points of higher time frames form stronger and more reliable resistance zones. Additionally, the more major pivot points a range includes, the stronger it gets. One of the most critical tools traders use to identify strong resistance (or support) zones is the “fix range volume profile”, which shows the amount of trading volume in a price range.

The higher the price range volume, the more credible the support/resistance zone. The Fibonacci tool can also be extremely helpful. If a Fibonacci cluster overlaps with the drawn rectangle, it significantly increases the strength of the shield wall.

You also can adjust the resistance zone tolerance using the Fibonacci retracement levels. Do not worry if you are not familiar with these expressions; you will learn all of them in detail in my future article.

As for a strong support zone, all the earlier information applies, only reversed. Trending markets make up two-thirds of the whole market duration. Obviously, no army can hold back enemies indefinitely; support and resistance shield walls are no exception. No matter how strong they are, most eventually fail to hold back the price.

But how can you profit from such breakouts when they arrive? Are there any lurking dangers regarding breakouts? How can we distinguish a valid breakout from a fakeout? In the next section, you will find the answer to these questions.

Once the price validly breaks through a support/resistance zone, it will likely continue moving in the breakout direction. To trade using support/resistance zones, you must first learn about breakouts and other support/resistance-related elements. Let’s identify how to find valid breakouts and capitalize on them.

Shield wall formations are hard to break through, but it doesn’t mean it never happens. Almost nothing stops the attackers from gaining ground when a rally successfully beats the shield wall.

This basically means that the scattered defenders are not organized enough to stand against the invaders, resulting in the defenders losing ground. Returning to the world of price charts, once a support/resistance is validly broken, the price is expected to continue moving in the breakout direction.

Breakout validity

I keep mentioning the word “valid” to emphasize its importance. It is of the utmost importance to confirm the breakout validity. Otherwise, you might fall into bull/bear traps. In short, sometimes defenders lure the invaders into their battleground by faking the shield wall breakout, trapping them, and slaying them all.

To avoid falling into such traps, you must always consider these factors before capitalizing on breakout opportunities. First, you must consider the breakout trading volume; high trading volume is a must for valid breakouts (regardless of the color).

If the breakout candle trading volume is not high enough or at least not above average, there is a high probability of the breakout being fake and a trap for novice traders. Then comes the candlestick pattern. A decisive bullish Marubozu candle or the three white soldiers pattern would be preferable for upward breakouts.

As for downward breakouts, a red Marubozu or the three red crows pattern would add to the breakout validity. After the initial breakout battle(candle), the following battle report, the confirmation candle, is also important.

In general, if the breakout candle is followed by another candle of the same color, it significantly increases the likelihood of further price movement in the breakout direction.

On the other hand, if the confirmation candle color differs from the breakout candle, it reduces the validity of the breakout. Last, but not least, looking at the larger trend in play can aid you in confirming the validity of a breakout. For example, if the daily chart is in an uptrend and you notice an upward breakout in the hourly chart, chances are that this breakout is legit.

However, if the breakout is downward, it has a high risk of being a bearish trap. You can also leverage technical indicators such as Relative Strength Index (RSI) and Moving Average Convergence/Divergence (MACD) to distinguish valid breakouts from fakeouts.

It is interesting to know that when bulls capture a resistance shield wall and move past that, they form a bullish shield wall (support zone) in the same area. Returning to the trading world, when a resistance zone is compromised and is no longer valid as a resistance, it acts as a support and rejects bearish price movements.

The reversed version also applies to a penetrated support zone; it turns into a resistance zone. Look at the example below; you can see the price shattering the resistance zone. Then, if not broken downward, it acts as a support for future price action.

You can also see an example of a last kiss (pullback). When the price passes a resistance line, pulls back and tests it as support before moving upward again, it is referred to as a last kiss. Last kisses also can be found in bearish breakouts.

The last kiss formation shares many similarities with fakeouts. Things might get tricky when you want to distinguish these two from one another. Fakeouts are harsh, fast and furious. The price tends to pivot shortly after a fakeout and drop back down with large high-volume red candles.

The last kiss, on the other hand, has a much more gentle slope. It happens over time with smaller low-volume candles and a smoother momentum. With the basics of support/resistance zones learned, it is time to talk about the 3 strategies traders use to benefit from shield wall breakouts.

Since discussing all of them is not possible, let’s go over three of the most common trading strategies. In this section, I will discuss the three mentioned strategies and compare their pros and cons.

Before talking about trading with support/resistance zones, I must emphasize how important capital management is in the trading world. Before opening any positions, make sure to analyze the market properly, both in the technical and fundamental sense. Also, safety first: make sure to always use a stop loss.

No matter how good you get at trading, there is always a chance of things going south, and if you are not prepared for unwanted scenarios, you will only lose money trading, like the majority of amateur traders. In addition to proper knowledge of technical tools and analysis, following a solid trading strategy separates market wolves from sheep.

As Morris Chang said, “Without strategy, execution is aimless. Without execution, strategy is useless.” The first strategy that I will discuss is the riskiest among the three; therefore, I’m going to address it as the “risky strategy”.

The Risky Strategy

This strategy states that the trader must open a position after the support/resistance zone is compromised. This strategy suits traders who don’t want to miss the market’s slightest chance of making profits, no matter how risky. A very tight stop loss range (slightly below the resistance line) is advised for the risky strategy to prevent huge losses in the case of a fakeout.

A rule of thumb in trading states that when a resistance line is broken, the price is likely to increase at least equal to the price range between the last valley and the resistance line. Although there is no accurate take profit price, you can set your take profit price based on the data provided by other technical tools and the mentioned rule.

The second strategy is a more conservative approach; hence, I call it the conservative strategy.

The Conservative Strategy

In this approach, after the upward breakout of the resistance line, the trader waits for a pullback to open a position with much cheaper prices. As for the stop loss, since the trade is much more calculated and safe, the last minor valley below the resistance line is suggested. In the conservative strategy, taking profit follows the same rule of thumb as the risky strategy.

This strategy allows the trader to open much safer trades with a much higher risk-to-reward ratio. Just beware of the fakeout points I discussed earlier(like trading volume and pullback momentum), so you don’t get trapped. The only downside is that in strong market movements with no last kisses for the old resistance line, the trader falls behind and fails to open a profitable position.

The third strategy is the combination of the first two. It works for strong market movements while reducing the trade’s risk. Therefore, I call it the Combo strategy.

The Combo Strategy

Depending on your strategy, there are two possible entries in the Combo strategy. The trader divides the trade capital, based on their capital management strategy, and then opens the first long position with a proportion of the money after a pullback to the shield wall.

The second entry is when the price passes the minor pivot that initiated the pullback. The trader can add to the opened long position with the remaining money. Since the Combo strategy benefits the pros of both risky and conservative strategies, it is favored by most professionals.

In future articles, I will share with you a detailed guide on trading with support/resistance zones, so don’t worry about more accurate trading plans and strategies. Stay tuned and practice your learnings by finding support/resistance zones in various price charts.

How can we find support and resistance levels?

Finding support and resistance levels is easy; you just have to look for price pivot points (major pivots). When a price range rejects upward price movement several times, it counts as a resistance level. On the other hand, when a price range repels downward price movement multiple times, it counts as a support level.

What are pivot point support and resistance levels?

Pivot points define support and resistance levels. Pivot points change the direction of the price, meaning that if the price is heading upward, it changes the price direction to downward or vice versa. These pivot points are created due to the shift in supply and demand when the price is about a support or a resistance level.

How to use support and resistance levels?

Support and resistance levels are used in various trading strategies. Some use them as take profit and stop loss points for their open trades. Others use support/resistance levels and price rejections to open new positions. Support/resistance breakouts are also used to open positions in the direction of the breakout.

How to trade based on support and resistance levels?

My suggestion is to wait for valid breakouts of the support or resistance lines. Then, open a position to the direction of the breakout. There are also other possible strategies, such as opening a position when a support or resistance level rejects the price.

How to draw support and resistance levels?

You must first look for price ranges with several major pivot points. Afterward, look for the tallest upper shadow in the identified price range. Then, select the highest point of the upper shadow as the zone’s upper edge and drag the lower edge down until it hits the highest body. That’s your resistance zone. As for a support zone, simply reverse the process.

Conclusion

In conclusion, support and resistance lines are key concepts in trading. They identify areas where the price of a stock is likely to stagnate or reverse direction. When support and resistance lines are combined with other technical indicators, they provide invaluable insights into the forces driving market behavior.

Support and resistance lines are essential elements of any trader’s toolkit and can be used as a guide to inform decisions about entering or exiting positions, taking profits or losses, or specifying appropriate stop-loss prices. The support and resistance lines in trading serve as key reference points for predicting prices in the future.

They have been used by traders for decades to identify possible points of entry and exit in the market. Support and resistance lines identify supply and demand dynamics in the market and are used to indicate the possible reversal of price trends. Supported by consistent market data, they provide valuable insights into market fundamentals and trends.

A support line represents an area of demand as buyers are willing to purchase a specific asset at any price below a defined level, while a resistance line symbolizes an area of resistance as buyers are no longer interested in buying at a certain price.

A trader might buy an asset when the price is near the support line, aiming for an increase in price over time. Conversely, the trader could consider selling the asset if the price is near the resistance line, aiming for a potential decrease in price over time. It is important for traders to recognize when a support or resistance line has failed or been broken.

As prices break away from the support or resistance line, a new zone of support or resistance can be formed. You can capitalize on such breakouts for major gains, but be careful of fakeouts, traps, and false pulses of emotion.

Thanks for following me through the last tour of the museum of technical analysis. In future articles, we’ll discuss various technical tools and patterns for a better understanding.