By now you should have a basic understanding of how to read candlesticks and decipher what is going on in the current timeframe chosen. You should be able to determine what price the market opened, what high it hit, how low price went, and what price finally closed at for the day. You should be able to change timeframes between 4 hour, 30 min, or 5 min, without getting confused. You should be able to look at a 4 hour chart, and form a hypotheses about what happened on a smaller time frame, without having to zoom in. If you are still unable to do any of the things mentioned above or not 100% confident, refer back to Lesson 1: Candlestick charts and timeframes before continuing, as things are only going to get more difficult.
Disclaimer: This may have some lingo that is higher level, but these lessons are meant to challenge you. If something doesn't make sense, google it like I mentioned before. Or I suggest reading "Reading Price Action Bar by Bar", then read this lesson. Everything will make a lot more sense, but hopefully I explain it well enough for stuff to start clicking and the pieces start to go together like a well oiled machine known as the Alabama Crimson Tide football team.
Support and resistance are two of the most talked about topics when discussing price and how traders or investors think price will act around certain areas. Developing the ability to analyze a stock chart and determine where you think you should take profit, or where you should be buying, depending on certain price levels on a chart, will be the instrumental in your success as a trader. The more you trade or more time you spend analyzing charts or price action, the better you will get identifying levels of support. This will enable you to buy at certain areas expecting bounces, and if those fail you are able to identify stop loss positions that will keep your losses small, while allowing your profit potential to be essentially unlimited. I'll explain a few methods you could use, that will allow you to take advantage of these methods later on. For now, let's just figure out what the hell I am talking about.
Support - can be defined as a price level that an asset does not fall below for a given period of time. I like to define support as a place where buyers begin to enter the market pushing price back up, preventing further decline in price. The more times the market bounces off a certain area of support the stronger and more confident these buyers are becoming which makes it harder and harder for price to fall below a certain area. Now of course this doesn't mean price is guaranteed to not fall below a certain area, but it helps bulls identify areas that they are confident placing bets that price will appreciate.
For example using the image below. You can see price came down and made a support near the bottom of the first highlighted red candle. Which you can see the bulls entered and closed the candle slightly above its low, which is a good indication, bulls are starting to re-enter. Then the following green candle confirmed that area of support by reversing momentarily. The third and final candle went down to test that same area of support again, and was again met with buyer support, so the bulls eventually took over and pushed price back up. A rule in trading I like to use, that I learned from my favorite TA(technical analysis) book "Reading Price Action Bar by Bar", is once price tests an area not once, not twice, but three times, it usually tries the other direction. Which was proven to be accurate in this example below.
An area of support on RIOT
Resistance - can be defined as an area where price meets pressure on the way up. I like to think of resistance as an area where people are wanting to sell and take profit or when people betting on price to fall again begin to enter (🌈 🐻 ). Resistance levels can be very short lived, depending on whether any news, or even large orders come in and take these certain areas out. As with support, the more times price attempts to break these areas and fail, the stronger selling becomes around these areas of selling pressure.
As shown in the example below, you can see price attempted to break .739 three times without breaking through. And as per my example above and my trading rule, I would expect price to try the opposite direction first before trying for a fourth time, so I wouldn't be trying to hold this stock overnight. This doesn't mean that the market won't open the next day and break right through this area, but I just know there will be a lot of selling around that same area now because more and more 🌈 🐻. are trying to short (bet on price falling), or even bulls are looking to take profit in that area to maximize their gains.
Daily chart for AEZS showing resistance around .74
Another rule of thumb I have (learned from the book as well), is if in fact price does try the other direction and fails, I would expect a break on the fourth attempt so my entry would be .01 above this resistance point (chart above). Now you may ask, "Why would you put it so high?". Since trading is a game of psychology, you are always trying to outsmart the other team. You are always trying to find ways to enter positions right about the same time that bears are "covering" their short positions or more people including algorithms are looking to enter.
If this set up was shown in live trading, I would be sitting patiently waiting for that .74 to be broken, because you have several things backing your position or entry. You have people covering their shorts (which they have to do by buying shares) because more than likely if they are short in this market, their stop loss is right above that triple top resistance; which is going to be forcing price further up in your direction. Also, you have bulls (or algos) on the sidelines waiting for the same confirmation that the resistance has fallen, "SEND IN THE TROOPS?!". All of these factors will help push price higher in your favor allowing you to take advantage of sudden increases in prices. If an area of resistance has broken or fallen, it usually turns back into support, so now you have a third layer of protection for your position. If you entered right above that area and price broke through you could even move your stop loss to break even or just below, because now you know it is "support". So if it breaks again, it could fall even harder this time, because bulls will more than likely just give up at this point and accept the bear claws in the ass.
If you entered the above mentioned position too early, say before that triple top was busted, you don't really have much backing you other than hope the bulls follow through and bust it after you enter. This is even more risky, because now you have to identify a place to put your stop loss which could be a lot further down than you are willing to risk, and is therefore just not worth the initial risk. It's better to learn these patterns, because these patterns are what algos are looking for to know when to buy and when to exit. If you can align your entries and exits with the overall money flow into and out of a stock, you will be exponentially more profitable as a trader.
The above paragraph probably sounded like a shit ton of run on sentences, but this is how you have to think when you are watching price. This is the psychological or mental mind games you are playing with people. These are the types of bets you want to make, it's like playing poker and going all in with Ace's and not 2, 6 off suit.
Support and Resistance levels can come in all shapes and sizes. People love to create imaginary support levels in their heads and take profits at even numbers. Like how Bitcoin struggled to reach $20k. It was just a mental celebration number in people's heads that had no material difference between $20k and $19k. Nothing changed by these numbers being broken, world poverty wasn't solved, Covid wasn't eliminated, it was just a cool number that looked good on everyone's twitter and instagrams. People like nice even numbers, so naturally almost all even numbers are support & resistance at some point in time. Support and resistance can be trend lines (shown below), previous highs and lows, or even analyst price targets. Another set of mental price targets and magnets are halfway marks. So basically any time a stock crosses a full dollar amount, say for example $2. If it were to reach $2.25, people automatically assume $2.50 is a target. Next after $2.50 is broke, people almost always expect $3 to happen. It's a never ending cycle as more and more mental hurdles appear which cause resistance on the way up for stocks, because bears are placing sell orders at these points to discourage bulls from reaching these price milestones.
As shown below, you can see support and resistance can be in the form of trends. You can see price touched the trend line up top twice and fell back down, and found support twice on the bottom before breaking down below on the third attempt to find support for Bitcoin's price. When price nears the resistance line up top, bears are taking more short positions by selling shares betting on price to fall which causes more pressure on price. Same thing near the bottom, bulls enter positions by buying more shares near this support line, causing price to reverse momentarily until the ending failure. Now that trend line is broken, and I would expect the lows from the previous attempts to be tested at some point in the near future.