In this chapter we will be talking about different breakout techniques as given below:
Support and Resistance
Support and resistance are two of the most important pillars in technical analy- sis. If a trader doesn't doesn't understand how they form and what they mean, it can really slow down their technical progress. However, worry not, I will explain everything about this in a greater detail later in the text.
A support or resistance level is established when the price activity of a market reverses and changes direction, putting behind a market peak or trough (swing point: a turning point price in the past). Support and resistance levels may carve out trading ranges, as seen in image 2.1, and they can also be observed in trend- ing markets when a market retraces and leaves swing points behind. Simply put, support and resistance can be spotted in ranging and trending market as well. Let's look at both the examples.
Support
Support is a level where a price movement in a downward direction stops for a while. In theory, support is when a lot of buyers come into the market and sur- pass the sellers. In short, when demand is higher than supply, prices go up. This stops a price drop or makes it turn around and go up.
A break below support suggests that individuals are prepared to sell at a new level. When support is broken, it is common for a new support level to be estab- lished at a lower price point. This is when we take the trade on short side and benefit from it.
A widely held belief is that the when the support is formed, a trader usually buys at support and intends to sell at resistance which is the part of reversal trading.
However, here we are talking about breakout trading so we will not do reversal trading and only take the short-biased trade when support is taken out on the downside.
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