How To Use Support and Resistance the RIGHT Way

How many times have you longed a breakout above a resistance level or shorted a breakdown below a support level for you to stop out of the market for a loss because it reversed on you as soon as it broke that support or resistance level. Now in this video I want to talk about why and how support and resistance actually forms and how we can use that concept to our advantage. That way we are only trading the right way around the support and resistance levels so we could take high quality setups, especially confirmed with the order flow. Now, in the previous episode of this Order Flow series, episode number four, I talk about how to stop thinking like a retail trader and to start thinking like a smart money trader. And this episode of the Order Flow series is really gonna expand on that concept. Because support and resistance is very easy. It's very simple. Everybody could do it. And I want you all to stop thinking this conventional way and start thinking like a smart money trader and trading around the levels that are gonna provide the greatest high quality opportunity for us. Now, if you're new to the series, welcome. I would recommend subscribing to my channel and also following me on my socials. I'll post them in the link in the description below. That way you don't miss any key information because this series is very, very powerful if you understand it, you study it and you take notes. Without further ado, let's get into support Resistance. That way we can start using it the right way. I want to ask you all, what's the first trading strategy or concept that you learned in the beginning stages of your trading career? For me, it was support and resistance and it's in every single technical analysis book. Every trader, beginner, advanced Wall street, bedroom traders all know what a normal support and resistance level is. It's the easiest to learn and in my opinion, it is the easiest to draw on the charts. There's very minimal barriers to entry. Anybody can learn this and anybody could simply go on their charts and plot a normal pre market high or just a normal resistance level and buy the market long once this level breaks and play a bullish position or mark a pre market low or just a that the market has bounced off of multiple times and look to play a bearish position once this level does break. Now the way that I look at it is if it's as easy as someone like my 80 year old grandmother could go and pull up a chart and plot a normal high or low or support resistance level, then the reliability of it is going to be very minimal and the efficiency of it is going to be reduced if everybody could do it, or if everybody sees it, or if it's the easiest thing that majority of other traders do. And this is how I feel. Support and resistance. Is that what normal retail traders view as support and resistance? And in this video, I'm going to explain how I view support and resistance and how I trade around it. Also, retail traders are buying when they should be selling, and they are selling when they should be buying. They are trading the opposite of what they should be doing. 95% of traders lose and a lot of people will say, hey, I'm usually on the wrong side of the market, so I'll do the opposite just because I know I'm normally wrong, that if I do the opposite, I should win. Retail traders are putting them in the position to be buying because when they should be selling and selling when they should be buying. How many times have you stopped out of the position for a loss? And then after you exit for a loss, the market eventually moves in your favor and you're sitting there so frustrated, hey, Carmine, I just took a losing trade. And then if I stayed in this trade five more minutes, it would have been a profitable setup. We need to position ourselves to start trading like a patient, smart money trader and stop positioning ourselves like a retail trader who is struggling. And I talk about this in episode number four of this order Flow series. If you have not seen that, I'll post a link in the description below to go watch that first. But now let's just talk about why a normal support and resistance level forms. What makes a strong resistance level? Now, in terms of a market's auction, what actually causes resistance to form in the market is resistance of higher prices. If the market begins to rally and we start trending up, the market will eventually reverse and start moving lower once the last buyer is factored into the market. So in terms of an auction, the market will move up until the last buyer buys. And it's our objective to figure out when the last buyer will buy, because this is when a reversal will happen. And this is when a resistance level will form that we can look to capitalize on that resistance. A lot of traders believe that there is more aggressive selling, which causes the market to drop. That validates a resistance level. Every single time we come into the resistance, the aggressive sellers are so strong that the market drops. But in terms of an auction, what actually causes the resistance level to form is when the buying dries up and the passive sellers are greater than all the aggressive buyers coming in. So what actually causes each of these rejections here at this white line is simply when the buying volume dries out and the last buyer buys that, there are more passive sellers, then there are aggressive buyers stepping into the market. And this is when we have the chain reaction to the downside. And this is how we can validate a solid resistance level. Think about this again. We talk about this in episode number one of this order flow series where the market moves up and we're in that. We're in the housing market right now. So let's just relate the stock market and the candlestick charts to housing prices. The prices of the house are going for 200,000, 300,000, and now some seller is looking to sell their house for $400,000. Well, one buy is present in the market and the buyer really likes the house. And the one buyer is willing to pay $400,000 for the house. This can represented by a stock price or a candlestick chart showing, hey, we've come up to this price and now the market is rejecting or stalling out here because there was only one buyer willing to pay these prices. The market will only move up after this if there's another buyer willing to pay a higher price. Call it $500,000. Now, maybe a month passes by or two months pass and now the third month comes and the market now a little stronger and some seller is looking to sell their house for $400,000. Another buyer says, hey, I'm willing to pay this, but only one guy is willing to pay $400,000. Since the last buyer buys, the auction then respects and prints this volume or this transaction, saying, hey, one guy was willing to buy here, but nobody else. And in terms of an auction, if no one else is willing to buy at these prices, there is more passive sellers or there's more houses for sale at 400,000. Then there are buyers willing to pay for 400,000. And now the market has only one option and that's to drop. This is why a resistance level forms now. Same thing for support. What actually causes the support level to form? Well, the market's going to drop until the last seller sells. Once the last seller sells, the market will start moving up. And this is how we can look to capitalize on a bounce off of a level of support. So our job now is to look and observe for the auction for the last seller to sell. In this example, we could see now a support level off of a range of prices Instead of a singular price level. We have just this range of activity here where we have multiple tests and Multiple bounces off of this range where the market had sold off, bounced, sold off, bounced, validating a level of support down here, which is highlighted at this pink box. And in terms of an auction, the market sold off and, and it sold off until one seller was left to sell and more buyers passively were down here. Then the market bounces, revisits this area and the same thing occurs. Call it maybe four passive buyers at $100,000, but only one aggressive seller hitting $100,000. The market has only one opportunity or one way for it to go, and that's going to be to the upside. And we can use this information to our advantage to, to play a solid support level. If you're confused about passive buyers or aggressive buyers and sellers, I recommend going to episode number one of this order flow series. Now to really validate this. Even better, we have to look at the order flow to understand a strong support or resistance level. We cannot rely entirely, strictly off of a candlestick chart because this does not show the true intention of who is buying or who is selling. We want to validate that if a resistance level is forming, this resistance level is forming because the buy volume has dried up. So in this example, point number one, we're going to see the market had aggressively sold off and we had a very large drop to the downside. If we were to look at the order flow off of this footprint chart, what we're going to see up here at 56.65 is, number one, a volume tail. And on this volume tail we could see that there is 29 total volume and a 29 positive delta. That means at the high of day, there was all aggressive buyers, yet the market could not move higher. The market moves up until the last buyer buys. This shows that the auction has finished at these prices and all of this aggressive buying is near the highs. There's tons of buying entering the market, yet the market could not move up. In fact, the market had sold off. This shows the sellers are very passive up here. And this is what's going to form the resistance level when there's more passive orders than there are aggressive orders. Point number two. So point number one is over here now, Point number two, this is a day later. A day later, the market hits this resistance level. And again, it doesn't have to be a specific exact price. It could be a range of prices. In this example, point number two, the same exact thing that we're going to see here, number one is at the high, we're going to see 136 total volume and we're going to see a positive delta of 136. On top of that, we're going to see the market break this white line which is where that original high was or that original resistance level. And we're going to see a lot of blue positive delta on this footprint chart. This tells me that buyers were very aggressive, but the sellers were more passive than those aggressive buyers. And the buyers dried up, could not bring the market higher and the market moved up until these buyers gave up, they became exhausted, they dried out. And the market only has one option or the auction has one option to only move down to facilitate the auction much lower, to see if buyers are willing to pay much lower. This is why a resistance level forms and we can validate a strong level via the order flow. The same thing is going to occur here. We have point number three. Now this is the same exact thing. This is just the same week. This is within a five day period, point number three forms, the market comes up. Now in this example we could see the same thing at the high. We see 51 total volume, 51 positive delta. That's not as important as all the aggressive buying coming in at the level of resistance and then all of the aggressive selling steps in. So now this is a little bit of a different example because the aggressive selling steps in. We want to validate why the resistance forms or why the support forms with the order flow. When we see a resistance level forming with a lot of aggressive buying, we. But the passive sellers are outweighing those aggressive buyers. This is going to validate a very strong resistance level. And we're going to see the same exact thing here on point number four. We're going to see all the aggressive buying. We're going to see all the positive delta, right? We're going to see all the blue. If you need to go back and reference delta or the footprint chart, I recommend watching episode number two of this series because I talk about delta and footprint. The market rallies up into 56, 65. That's the same level that I mentioned earlier. All the aggressive buying, a plus 1200 delta. Yet the market can't break out. There a passive seller sitting here absorbing and the buyers are becoming exhausted. And this is validating a very strong resistance level. And we can use this to our advantage or use this information to short this resistance level rather than looking too long. This resistance level now, same thing, flip it to the support side. Here we have a double bottom on an intraday basis and I want to dive deep into the order flow. Again, you can use a candlestick chart to spot the support and resistance. But when you validate this with the order flow, this is when I get the best advantage or the greatest edge in the market. We could see the double bottom here and on this double bottom, number one, we see a volume tail. And if these terms or concepts are confusing to you, I recommend starting from episode one, especially if this is the first video you're watching of the series. Go back to episode one and watch them all in order because they're all going to make sense one after the other. Here we have a volume tail as the market's selling off, which forms the first number one low and now number two, the low that forms. Here we're going to see the double bottom and is because of the aggressive selling. Here you can see a negative delta of -451 and then another volume tail over here indicating that the market moved down. The selling pressure was very strong. The market sold off until the selling gave up, the selling became exhausted and then the passive buyers outweighed the selling and then the market rallies up and forms that level of support. Now same thing. We're going to see point number two here. We're going to see the following session. This now acts as support once again. Now why does this form? We're going to see all the aggressive selling here. Remember, the concept is simple. The market will move down until the last seller's sells. Now you don't have to take that literal and look for literally the last sell bubble to come in or the last sell print to come in. It's just simply in terms to make it simple. Until the selling dries up and until the passive buyers are greater than the aggressive sellers, then the market will move down. And once that occurs, that's when the support level will form and that is when we could see the market start rallying up higher. When the passive buyers are stronger than the aggressive sellers, when the aggressive sellers are not as strong as the passive buyers, this again is when that support level is going to form. So in this example we can see all the selling here forming this low. We're going to see the market break it down. We're going to see the most amount of selling for this day. And this is a 30 minute footprint here. When the market forms the low and the same exact thing, we're just seeing all the selling drill into the market. And if there's a lot of selling drilling into the market, but the market is not moving down, we have somebody who is passively buying passively Absorbing and the sellers, once they become exhausted and they stop selling, the market only has one option and that's to move up. And we could use this to our advantage to mark out a support level. That way we could play a trade in the future knowing that this is an origin location of support. Or in real time we could see this action form and look to capitalize on the sellers becoming exhausted or the support level forming in real time. Now let's talk about what makes a support resistance level week. Right here we could see a solid double bottom and people would mark a simple support level and say, hey, as soon as this level of support breaks, I am going to take the market short. Now in some cases that could be great and in a lot of cases that's going to be really bad approach to the market. But this is a classic double bottom. We can mark the lows. It's a simple clean thing that my 80 year old grandmother can mark on her charts and say, hey, as soon as this breaks, I'm going to play puts or I'm going to capitalize on a bearish position. Now to validate that this level could break or has a higher probability of selling off once it breaks again. We want to validate this with the order flow. Now, other than the first low forming right here, this is number one. Number one over here. This in real time looks like a solid support level because we see a really large negative delta, a very large seller. We also see a volume tail forming here. So at point number one, this is a solid support level. However, point number one really isn't support until point number two forms. Like if this did not form here and we don't know what happens next other than this being the low of day, this would not be a normal support level that a lot of traders would mark. It wasn't until point number two that the market actually had bounced off of that. Traders would then mark this as a support level because of how well the double bottom formed and the market bounced off of it. However, on point number two, there's nothing significant here indicating that sellers became exhausted. In fact, there's a lot indicating here that aggressive buyers are strong. What makes a weak support level is if there's a lot of aggressive buyers trying to bring the market up higher. What makes a strong support level is if there's a lot of aggressive sellers that can't bring the market lower because the market moves down until that last seller sells. So in this example we could see a lot of blue on point number two, which means there's A lot of aggressive buyers coming into the market in terms of support. If what causes the market to bounce and formulate a low or formulate a support level is aggressive buyers, then this becomes a level of support that is weak, that is likely to be broken at some other point in the future. We could see later in the session, about 10, 15 minutes after the market breaks this double bottom and this old support level then becomes resistance. And this is going to be a key example that I'm going to go over later in this video. So the market eventually breaks it, validating that this is a very weak support level and we can look to capitalize on the market short once that support level breaks. Now, something very key, and this is a very big mantra to my analysis in my trading strategy is obvious things versus non obvious things, like I said earlier in how I started this video, is that if my 80 year old grandmother could spot it or draw it on her charts, then the reliability of it working is probably going to be very slim or the effectability of it is going to be diminished because everybody's watching it or it's obvious that you see everybody talking about it on Twitter where everybody's watching the same stock to break out or break down because maybe Jim Cramer talked about it. When things become obvious, the reliability of it is slimmer. And my job as a trader and I talk about this a lot in the investor trade community is spotting non obvious things way before they become obvious. The greatest edge for me in the market is this right here. Spotting not obvious things before they become obvious. When no one's watching it or no one cares about the move or no one's buying it, that's the best time to buy. When everybody's watching and everybody's talking about it and it's all crowded that everybody's doing this and that's then it's good signal for you to stay away. Especially if everybody's doing it and majority of traders fail. Just think about that for a second. If majority of traders fail, why do what everybody else does? So spot non obvious things well before they become obvious. Start feeding or thinking to do the opposite of what everybody else is doing. If 90% of traders fail, then we should not do what 90% of traders are doing. If 90% of traders are watching Tesla or Apple or the S&P 500 to break out above a resistance level, then the chances of that breaking out will be slimmer. That's not to completely avoid it and remove it just because everybody's watching it. There's a lot of instances where it actually does break out because everybody else is buying it. But the chances of that happening or the probability of it is slim if everybody's doing it, especially if everybody fails. I personally in my trading use support and resistance as areas where buyers or sellers become trapped. Because this is where I first look to play reversals. I do not look at support resistance first as breakout points. I look at support and resistance as reversals where I look to profit off of short term pain in the market. If I know majority of retail is buying a breakout above a resistance level, I'm first looking to be a seller and sell and I could get their liquidity. If they're buying, I can sell to everybody else who is buying and I'm looking to profit off of this pain. If those short term traders, those retail traders are wrong, they stop out, they're in pain, they're going to lose. This for me is where the greatest gain comes in. And this is why I prefer playing reversals at support and resistance first rather than breakouts. We could see just a normal resistance level here. This is the example I gave you all earlier. Majority of retail traders would be buying just a simple resistance break. Hey, it happened too. Three times the four times the charm, the fifth times the charm. As soon as this level breaks, I'm getting in long. This is the wrong approach. I first use resistance levels as areas where I look to short the market. Again, spotting non obvious things. Here's a simple trend line break, right? We talked about this in episode number four of the order flow series. Here. A lot of traders play a bearish position where they short the market on the break of the trend, right? This is an obvious setup. An obvious setup is, hey, we have a wedge right here. As soon as this wedge breaks, I'm getting in short. How many times have you done that that you've stopped out for a loss and you get frustrated? Hey, I just learned about this wedge in the book. As soon as this happens, I'm going to make money off of it. Eventually it doesn't. I like doing the opposite and I like spotting obvious things and fading that are going against the opposite of what normal traders are doing. In this example, this is a setup that I took the market long. We could see the volume down here. We could see a break. Knowing that sellers are shorting the market of this wedge break where I could look to long the market when everybody else is selling and we can confirm this with the order flow, the market breaks the trend. We can see all the red bubbles, red bubbles and Then as it breaks the trend, we see even more red bubbles validating that sellers are present in the market. When everybody's selling, I'm looking to buy the market because where there is pain will be gained for me. Now, how do I place support and resistance? Number one is I look for a break of resistance which then acts as support or a break of support which then acts as resistance. Now, the market's not always going to reverse. Some markets are more mean reversion markets, meaning they tend to reverse more than they do as trending. So it depends on the instrument, depends on the market. But if I'm playing a support and resistance level that is very obvious, what I will do is, is I will let it break. And then once resistance breaks, I will then look for it to act as support. Sort of like a break and retest, shout out, desi, or a break of support, which then acts as resistance. In this example, we could see the same exact resistance level that I mentioned earlier. Resistance, resistance, resistance. Again, we don't have to make it a singular level. We can make it a zone. A few weeks later, the market had broken out above it and then that resistance level had then act as support. Three different sessions. If resistance breaks, obviously a break and retest resistance then should turn. Support could be the first way that I play support and resistance. Here's that example I gave you all earlier, the double bottom point number one. Point number two, if the resistance of the support level breaks, I would then want that level to act as resistance. We could see it broken. It resists 1, 2, 3 different attempts. Where then we can look to play the market short. I rather get in on the retest rather than as soon as the level breaks. Because if it's so obvious and it breaks right away, probably you're going to have everybody buying that breakout and the market will do its best to to put them in pain or screw them or stop them out the most. I do not like putting myself in the position to be that trader. I rather let it do its thing. And if it wants to retest like it does in these examples, then this is where the edge comes in for me. So a break and retest is point number one. Point number two, like I mentioned earlier, is I'm looking for reversals. I'm looking for trap participants. Where there is pain, there is gain. This is the biggest concept to my strategy is I'm looking for reversals where there's a lot of buying or selling activity, where those buyers or sellers are not getting rewarded. So this is where there's a lot of emotion. If there's a lot of emotion and you're wrong with this emotion, there's going to be a lot of pain. Meaning you're going to have to stop out, you're going to have to cover your trade, you're going to have to exit for a loss. And I could use this information, I could use this to my advantage to gain. It's a zero sum game. And you know, some people are probably going to comment like that's messed up. You're looking for pain because there's gain for you. But in the market, the only way and that I found the best edge to come in is where there's a lot of traders stopping out or where there's a lot of traders showing effort and not getting rewarded and they have to stop out because they're taking a big loss. This for me is where the biggest gain comes and the most profits come from or the greatest edge over my competition. So this right here looks really bullish. This is the same resistance level from earlier, right? This right here, as the market's about to break out above this, nobody could sit here and say this looks bearish, right? It's consolidating here at the high. It's holding the high versus the previous attempts. We hit it and immediately rejected, right? Immediately sold off. Immediately sold off. Now we're coming up into this resistance level and we're consolidating up here. This looks very bullish and this looks ready to break out, right? Well, guess what? The market breaks this and fails. If you bought this breakout, you would have been screwed. Imagine longing, this breakout above the high, right? And this is the. This is the whole theory of where there's pain, there will be gain. I'm first looking for reversals. I'm first looking for where traders are trapped. Imagine buying this breakout right now. You're long up here just because the resistance level broke out and then the market dumps on you. You're in pain, you're going to have to stop out for a loss. I could use this to my advantage to capitalize on a bearish position or take the market short or play puts. We can read this via the order flow. Now, how do we read this with the order flow? I talk about this in episode number two of this series. But in this example we could see the buying volume or the positive delta increase as the market's breaking above the resistance level. Now we also see a double top here. And on this to the double top, we could see a lot of volume on These two bars. And not only do we see a lot of volume, but we see at one price, we see a positive delta of 279 and then a positive delta of 338. So there's significant buying volume here. Above the resistance level, there's buyers showing a lot of effort. If they're showing effort, the market theoretically should start moving up. If there's a lot of effort but no reward, the market only has one option, that's to move down. And we can use this, this information to our advantage. And this is how I look to capitalize on trap participants. If you want to use a heat map, you could see the same exact thing here. You could see that double top, same way you could on the footprint chart here. You could see all the aggressive buying, which is the green bubbles that fails. The market breaks back onto the resistance level and then resists it again on multiple occasions. And this is how I could look to capitalize on this setup. This was a $22,000 profit taking the market short $3,700 worth of risk, about a 6 to 1 risk to reward ratio. So I risked 3, $700 to make a $22,000 profit capitalizing on this failed breakout above the resistance level. I do not like buying a breakout above the resistance level. As soon as that breaks, I am first going in there with the intention of reversing that move. If that support or resistance level breaks now, I will get long or short. If a support resistance level is there prior to it breaking. And I rather use that level as a target once it breaks. Now what I mean by this is this is a trade that I did not take. But theoretically speaking, this is the same example where I asked you all earlier that this looks bullish, right? We're consolidating at the high. So let's say this did not occur yet. We find something, let's call it a demand zone right here. And we get the market long right here because we're spotting buyers before the resistance level, level. There are many occasions where I will get long before the resistance level breaks with valid confirmation. If I could spot those buyers or spot those sellers, speculating that the market will, if those buyers are strong here, break this resistance level. And then I would use that resistance level as a target rather than an opportunity to open up a new trade. So let me say that again, if I spot buyers, let's just call it here, I will use this information that buyers are present saying, hey, buyers might have an agenda since we're so close to resistance level, that If I'm reading this data accurately, that these buyers may want to go break that resistance level. So instead of getting long as the resistance level breaks, I can get long prior and then use the break of the resistance level as a target. And this would have worked well getting long down here. Maybe it was like a demand zone right here. And then say, hey, as soon as the resistance level breaks, I'm going to use that as a good opportunity for me to sell. If everybody's buying this and everybody's using and providing liquidity and injecting it into the market because they're buying the breakout, I could use that to my advantage and sell this long to everybody else who is buying. Remember, there's two participants to every single transaction, a buyer and a seller. If everybody's buying, I want to sell it. If everybody's selling it, I want to buy it. This is my mantra and this is how I navigate the markets on a daily basis. I'm doing the opposite of what majority of traders do. And these are the three ways that I play support and resistance. Point number one and point number three are continuation setups. And point number two is mainly a reversal setup. I use point number two the most because I am mainly looking for reversals where there's obvious support or resistance levels because of how easy they are to draw and how obvious they are to every struggling or normal retail trader. And this is how I navigate the markets. And this is what I have a lot of success with, using support and resistance the, let's call it unconventional way. Now in the next episode, episode number six of this series, I'm going to go over how to use volume around support and resistance because I'm very confident that a lot of traders are using volume completely wrong. And I want to show you all the right way to use volume, especially at a support and resistance level, to confirm your setups and start taking high quality trades. If you enjoyed this video, I would appreciate a thumbs up comment. Any questions? And if you're new to the series, I would recommend subscribing to my channel and starting from episode one and going in order because they're all going to make sense one after the other. Stay tuned for episode number six because it's going to be so important on reading and understanding how to use volume the proper way. I'm ending it on that note. Peace out.