Break, Pullback And Continuation

  • The S&R indicator is one of the best indicators
  • It’s very useful for reading charts and analyzing prices

What Are The 3 Key Steps With Support & Resistance Levels?

Do you feel overwhelmed when looking at a price chart? Are you sometimes confused by contrary information and signals?

Paralysis of analysis is often a common problem for traders… Simply because the price chart offers a wide range of trading ideas.

The trick is to focus on setups that offer a positive expectancy in the long term. In this article, you will learn three key ingredients for simplifying your analysis and trades:

  • Letting price action decide, which is key for any price action strategy.
  • Focusing on key moments using the BPC concept (break, pullback, and continuation pattern).
  • Understanding that the best breakouts occur around strong support and resistance.

Now let’s start with how to learn price action trading.

Why Are Support & Resistance Levels Key For Trading?

Support and resistance (S&R) offer traders a short-cut for finding key moments (also called decision zones). Basically, S&R offers a trading edge on the price chart. Why?

Because price action in Forex trading is expected to make a critical decision when approaching the support and/or resistance zones:

  • Break the support and resistance level. This is used within a price action breakout strategy.
  • Or bounce at the support and resistance level. This is used within price action bounce Forex trading.
  • This is especially true if the S&R is considered strong (aka more confluence).

Then, traders can trade the bounce or breakout at support and resistance. The main advantage is this:

  • There is a higher probability to find winning trades at these key S&R levels.

One of the better methods for confirming the bounce or break at S&R is using price action trading… But more about this will be added later in the article.

First, let’s offer some practical examples of break and bounces at S&R, before diving into more details.

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The image above shows a few practical examples of bounce and breakouts:

  • The green lines indicate where price action bounced at a support trend line.
  • The blue box shows a bounce at the 50 moving average.
  • The green boxes indicate a bounce at the Fibonacci support levels.
  • The dotted orange trend lines indicate where price action made a bullish breakout (blue arrows).

Support and resistance levels are key within a price action pullback strategy and price action strategy and trading.

Determining Breakout Zones Using Support & Resistance

Support and resistance levels can be determined as follows:

  • Trend lines and trend channels.
  • Fibonacci levels.
  • Tops and bottoms.
  • Round and quarter price levels.
  • Price bands and moving averages.
  • Other price indicators like Ichimoku, envelopes, parabolic, and more.

The more support and resistance levels are located around the same price level, the stronger the support and resistance level becomes.

These levels are called POC zones (point of confluence or point of control).

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Here is how support and resistance work in relation to price:

Resistance = Price Action Is Below The Key Level

  • Breakout = price action breaks above the resistance.
  • Bounce = price action bounces at or around the resistance.

Support = Price Action Is Above The Key Level

  • Breakout = price action breaks below the support.
  • Bounce = price action bounces at or around the support.

Explaining support and resistance from A to Z is beyond the scope of today’s article. For a detailed breakdown, check out our special dedicated article.

Understanding Price Action Trading via Candlesticks

Identifying support and resistance (S&R) alone is often not enough for finding good trades.

Although more advanced traders might feel confident in trading immediately at the S&R level…

However, beginning and intermediate traders are advised not to jump into any trades at the support and resistance… Why?

Because correctly assuming that price action will bounce or break the S&R zone is difficult. It takes much more experience to analyze properly… And often traders will get it wrong.

The safest and most solid tactic is to use price action to confirm their trading ideas at S&R zones. What does this mean?

  • A simpler approach is for traders to wait for the price action to make a decision.
  • Traders can wait for the price to bounce at or break through the support and resistance before committing to a trade.
  • A candlestick chart is one of the best ways of measuring price action in Forex and trading. Bar charts also work well but line charts do not offer the same details.

Such breakouts and bounces occur on all time frames and instruments:

  • But the charts with more price movement are usually more reliable.
  • Also, charts on higher time frames usually offer strong S&R zones and more valuable candlesticks.
  • Lower time frames can be used but traders need to be more cautious in their setups, take less risk, and aim at closer targets.

A candlestick chart shows vital information about the ongoing battle between buyers and sellers.

It provides immediate information about which side is winning. Let‘s check how:

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Work With Candle Closes

Always analyze closed candlesticks because open candles are not confirmed and traders do not know how they will close. The information can change anytime when the candle is still open.

Candlestick Close Versus Open

The candlestick close versus open is key:

  • Bull control: a candle closes above the candle open (green box in the image above)
  • Bear control: a candle closes below the candle open (orange box).

Candle Close From High or Low

Another factor is how far the candle close is from the candle high or low:

  • Bull control: a candle close near the candle high (green box).
  • Bear control: candle close near the candle low (orange box)
  • Bullish reversal: candle open and close far away from the candle low (called a wick – blue box).
  • Bearish reversal: candle open and close far away from the candle high (called a wick – red box).

Explaining candlesticks from A to Z is beyond the scope of today’s article. For a detailed breakdown, please check out the special dedicated article on support and resistance.

Our next step is to combine candlesticks and support and resistance levels. This will explain how you can trade price action for breakout and bounce setups.

Using Price Action Trading for Measuring Breakout And Bounce

Now you know two important factors:

  • How to identify support and resistance.
  • How to analyze price action trading via candlestick patterns.

The next step is to use both for analyzing and trading breakout and bounce setups. First of all, always trade on a demo first and then only risk capital that you can afford to lose.

Secondly, here are the 3 main steps:

Wait For Price Action To Reach S&R

Wait for price action to reach a strong confluence of support and resistance levels: try to avoid trading in the middle or in between S&R zones, because there is no long-term edge in these trade setups.

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Wait For Price Action To Respond To The S&R Zone

The type of response depends on whether traders are looking for bounce or breakout setups.

Price Action Bounce Forex Trading Setups At Resistance

  • Bearish candlestick patterns emerge.
  • Candlesticks have a close near the low.
  • Candlesticks have a larger wick on the top.

Price Action Bounce Forex Trading Setups At Support

  • Bullish candlestick patterns emerge.
  • Candlesticks have close near the high.
  • Candlesticks have a larger wick on the bottom.

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Price Action Breakout Strategy Setups At Resistance

  • Bullish candlestick patterns emerge.
  • Bullish candles close above resistance.
  • Candlesticks have close near the high.
  • Candlesticks have a larger wick on the bottom.

Price Action Breakout Strategy Setups At Support

  • Bearish candlestick patterns emerge.
  • Bearish candles close below support.
  • Candlesticks have a close near the low.
  • Candlesticks have a larger wick on the top.

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Decide whether the candlestick reaction is in the same direction as your analysis. Not all trade ideas need to be taken. It’s best to focus on the best setups – especially at the start:

  • If your analysis is bullish, focus on long setups with the best potential.
  • If your analysis is bearish, focus on short setups with the best potential.

These 3 steps should give traders an edge when trading in the financial markets. Just keep in mind that practice makes perfect.

Analyzing charts requires time to master, just like any other skill… Luckily, there is one more trick that can help.

What’s The Chance Of Breakout Versus Bounce?

There is one more tip that usually helps traders.

Besides the strength of the support and resistance zone and the price action-reaction at the S&R zone, traders can also analyze the number of attempts that price is testing S&R.

What is meant by an attempt?

  • The first attempt is when price action is testing an S&R zone for the first time.
  • The second time is when price action is testing an S&R zone for the second time.
  • The third time is when price action is testing an S&R zone for the third time, etc.

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Why is it important?

  • The first time price approaches a strong S&R zone, price action usually bounces.
  • The second time price approaches a strong S&R zone, it is 50-50% whether price bounces or breaks.
  • The third time price approaches a strong S&R zone, price action has a higher chance of breaking.
  • The fourth time or more than price approaches a strong S&R zone, price action has a very high chance of breaking.
  • Keep in mind that this is valid for strong S&R zones. Weak S&R zones are always vulnerable to both breaking and bouncing.

Of course, these are just rough guesstimates. Price action can always break on the first attempt too and bounce on the 6th try. But in general, the above ideas help improve the odds.

Last but not least, perfection in analyzing chart is never possible. False breakouts or false bounces can always occur.

Do not get discouraged by failed setups. The goal is not to avoid losses but to earn more with winning trades than lose with losing setups.

Traders can use the same price action strategy tips to see if price action is showing any potential signs of a false breakout or bounce.

What Did We Learn From This Article On Break, Pullback, And Continuation?

In this article, you learned several valuable points for analyzing breakouts, pullback, and continuation.

  • Why are support and resistance levels key for trading?
  • Understanding price action trading via candlesticks.
  • Using price action trading for measuring breakout and bounce
  • Determining breakout zones using support & resistance
  • What’s the chance of breakout versus bounce?

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How Do You Use A Price Action Strategy?

A price action strategy focuses only or primarily on the recent price action changes. These changes can be seen for instance via the popular Japanese candlestick patterns.

These candlesticks and candle patterns offer traders insight into the current balance between bulls and bears. Certain patterns offer trading opportunities.

Price action strategies usually rely only or mostly on price action and less on fundamental analysis and technical indicators. Of course, traders can also create a mixed trading plan based on price action, fundamental analysis, and technical indicators.

Day traders often use price action strategies for shorter intra-day trades. But even swing and long-term traders could use price action as well, often as a supporting tool for their trading decisions.

Which Is Better Price Action Or Indicators?

The answer is simple: every trader will have their own preference. Both price action and indicators have their own advantages and disadvantages. A trader must build a trading strategy that fits their trading personality and time schedule – whether it includes only price action, only indicators, or both.

The main advantage of trading price action only is its simplicity. Many websites and traders advocate for price action only strategies (called “naked chart trading”) because they believe it’s simpler for beginners and less confusing. The disadvantage is that the chart lacks context about the position of the price compared to the past.

The main advantage of trading with both indicators and price action is that it offers more context. Using support and resistance levels, the trend, and price patterns provides an extra layer of information that otherwise would be missed. Traders that do not use support and resistance could miss these key breakout and bounce levels.

All in all, the debate will never fully end. Each side will offer arguments in favor of their view. In reality, though, there is no single right answer. The best a trader can do is try both styles and see what suits their vision the most.