Sean Twizer explains support and resistance levels, where buyers and sellers repeatedly push back price movement. Round numbers act as self-fulfilling levels because traders cluster orders there. Once broken, support becomes resistance and vice versa, and institutions trigger liquidity sweeps to capture stop-loss orders.
Now that you've learned how to read Japanese candlesticks and seen some examples of them, let's dive deeper into the world of technical analysis and find out how we find support and resistance levels and actually identify trends.
Support and resistance levels are areas which a lot of buyers or sellers are waiting at. Support, as the name suggests, is an area which a lot of buyers are waiting at to buy the stock. That means increased demand, which makes it difficult for sellers to push below. Hence, it is called support. This area can stop a downtrend from going further down, kind of like a floor. We can find support levels by searching for places the stock has bounced back multiple times. For example, let's open Amazon. We can see that the stock has retested this price several times and bounced back up. Sellers haven't managed to break that price level. Hence, it now becomes a support line. Resistance, on the other hand, is like a ceiling. This is where you can find more sellers, which means increased supply, which makes it difficult for buyers to push the price above and can stop an uptrend from going upwards. Hence, it's called resistance. It's like the ceiling, basically. In order to find the resistance level, we're going to do the same as we did with the support. First, we open up the chart and then we start searching for places to stop stock has experienced multiple rejections and reversed down. Basically, we're looking for price areas that the buyers cannot break. As we can see here, the buyers got rejected multiple times at this area, which tells us this is a resistance. These levels are crucial for understanding market dynamics and making trading decisions. A few rule of thumbs you need to know are: the more times the support resistance level has been tested, the stronger it is. As well as that, round numbers are usually considered and being perceived as support and resistance levels just because they're round, as lots of traders and investors will be looking to take profits or place their stop losses at those levels and are looking at them that way, which makes it a self-fulfilling prophecy.
Another concept you need to understand regarding support and resistance is is once the support gets broken down, it now acts as a resistance for the stock. And when the resistance gets broke out, it now acts as support. That meaning that if there was a resistance at $100 and we broke through it, now it should act as support for the stock. And every time the stock will touch the $100 mark, it's supposedly going to bounce back up. Round numbers are usually being perceived as support and resistance as well, as a lot of traders and investors are going to place their orders over there. And another concept we need to understand with support and resistance is liquidity sweeps and fakeouts. A fakeout basically means the stock has broken out but didn't quite manage to do it forcefully, hence it's going to fake out and retrace back below the resistance level. Making a lot of traders think that we actually managed to break out. But in the end, the move failed. And finally, liquidity sweeps. This is a topic that's been heavily discussed lately, and basically all it means is for large institutional investors to enter a stock, they need a lot of liquidity, and I mean a lot of liquidity. So basically what they do is they cause a stop loss raid and gobble up all the shares for themselves. Effectively taking the retail shares. Stop-loss raids happen when a lot of traders place their stop-losses at the same level, and then when price reaches that level, like a domino effect, one stop activates the other, causing a chain reaction of stop-losses to be activated and the stock price to actually plummet. This sharp decrease in price can actually activate more stop-losses. And cause a sharper decrease in price. Now let's talk about trends.
Trends, as the name suggests, are the trend of the price of the stock. There is a downtrend, which means the stock overall is going down, and an uptrend, which means the stock overall goes up. So how do you know if a stock is in an uptrend or a downtrend? Every uptrend starts with a higher low. You have a low. Let's say, for example, this is $1 and this is $1.05. What that means is the price comes back down, people that were willing to pay $1 are now willing to pay $1.05 for it. So that puts in the first higher low. Then you have a higher high, and when price breaks through that high, now they're willing to pay higher, signaling to the market that there's more demand. Then from there, you just want to make sure that it continues to put in higher lows and higher highs. Until the trend breaks. For a downtrend, you have a first lower low. That means sellers are willing to sell for less. In a downtrend, we're going to look for lower lows and lower highs. So let's go to the chart again, and as you can see, the stock is going up. But in order for us to identify the trend, what we're going to do is click here on the trendline tool, and we're going to start right here where the trend starts. Now let's move to the right, and as we can see, we see a higher high, right? It is higher than the previous highest point we had. Now let's move to the right again. As the price goes down, it stops at this point. So this point is lower than the previous point but also higher than the first point, right, which was the lowest point if you recall, which means the price has formed a higher low point. Now let's go further to the right. What do you see here? Right, the price have formed a new high point, which is higher than the last high point we had. Now that we have several points, we can draw a line. This line is our trendline, and like I explained support lines, the trendlines are also considered support and resistance lines. We can expect that every time price hits one of these lines, it is going to get rejected until eventually the trend will break, as it did right here. And then we, as informed investors, are going to take a step back from the stock and wait for it to form a new trend. The same principle applies to a downtrend, just in reverse. Let's fire up the chart again and break it down. We choose the highest point, and as you can see, the price kept on forming new lows and as well made lower highs, as the highest point of each day was lower than the previous day. Besides trends and support and resistance levels, we also have channels. What it is is basically an area between a support and resistance level where stock price fluctuates and usually gets accumulated, as you can see on the screen here.
By understanding these concepts, you can gain valuable information into how the market is going to react, make better decisions, and effectively manage the risk in your portfolio. If you didn't understand everything I said this lesson. Please rewatch it, as technical analysis is really important. As a matter of fact, it's one of the most important lessons in this course, so make sure you understand it completely.
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