Range: between Support and Resistance

Technical analysis is the process of plotting the price of an asset on a chart. The aim is to highlight levels at which the price is likely to bounce back or be rejected. But also those levels which, if crossed upwards or downwards, will give indications to buy or sell. The first step to master when you start trading is to be able to spot the key horizontal levels, which are the easiest to recognize.

So, what are ranges, support and resistance?

A range is simply when the price repeatedly bounces between two horizontal boundaries. The upper boundary is called "resistance" and the lower boundary is called "support". Below is a theoretical and practical illustration of a range.

To successfully highlight a horizontal support, look for price zones where the price has often bounced in the past. It will represent a zone of interest for buyers. Be careful, however, if the last support on which the price bounced breaks down, this shows that buyers are no longer buying in this price zone, and will therefore be a sign of selling, until the next support. Below is an example of a support that has held up very well, highlighting the interest of buyers in this zone:

A support is not a magical horizontal line that happens to be 100% accurate to the dollar. It's usually a thicker zone. By drawing a zone rather than a line, you'll end up being more precise and less perturbed by small variations in the latter.

The same principle applies to highlighting horizontal resistance. You'll need to look for areas on the chart where the price has often been rejected. These highlight profit-taking areas for traders/investors. But if it's the buyers who have the most strength in the market at the time, and resistance is broken on the way up, a buy signal can be given. It is advisable, however, to wait for a re-test before taking a position, i.e. for the price to bounce off the levels that represented resistance, they will then become a support level.

Here is an example of resistance:

Important note: It's vital to understand that support and resistance aren't necessarily horizontal: support can be bullish or bearish, and so can resistance! It's by analyzing all these key levels that you'll be able to make the charts speak for themselves. It's also how we can determine and recognize particular chartist patterns, giving us probabilities to exploit.

Here's an example of a chart analysis showing the different steps to follow to highlight the various supports and resistances, so that the blank chart becomes organized and legible.

Step 1: Your chart is blank

Step 2: Highlight horizontal supports and resistances

Step 3: Highlight bullish and bearish supports and resistances

Back to ranges:

A range, while by definition representing a period of stagnation, accumulation, and consolidation, can offer trading opportunities. In fact, there are several ways to take a position when a range is forming.

The first way to trade a range is to buy when the price reaches the lower support level. If you're betting that this level will be bought again, you can theoretically place your target on the upper boundary, where you'll take your profits.

However, keep in mind that nobody can predict what's really going to happen, so place a Stop Loss below the last low points, below the support zone. If the opposite happens to what you expected, you won't suffer the fall, as your losses will be automatically cut and limited. To optimize your entry into a long position, you can wait for reversal patterns to be confirmed in smaller time units.

It's also a good idea to place automatic sell orders (Take Profit), so you don't miss out on profit if your target is reached. You can also place them at different levels to take profits throughout the rise and come out ahead even if the target is not reached. Finally, when you see the price rising, you can place a break-even order. This is an order to sell at the price of your purchase, so you can't lose out by selling at your entry point.

The second way of taking a position in a range is to bet on the downside (go short) when signs of a reversal are confirmed at the upper limit (resistance). All you need to do is adapt your objectives and risk by setting your Stop Loss and Take Profit.

Finally, you can also take a position when the range is broken, by a bullish or bearish exit. To enter more confidently, it's advisable to wait for the price to retest the former support or resistance levels to confirm the range exit. To set your target and profit-taking level, simply plot the width of the range at the breakout point. Below are illustrations of shorts and longs at the end of a horizontal channel:

Finally, you can also take a position when the range is broken, by a bullish or bearish exit. To enter more confidently, it's advisable to wait for the price to retest the former support or resistance levels to confirm the range exit. To set your target and profit-taking level, simply plot the width of the range at the breakout point. Below are illustrations of shorts and longs at the end of a horizontal channel: