Support and Resistance and Candle Stick Patterns

Support and Resistance:

Support: Support is a price level at which a downtrend is expected to pause or reverse due to a concentration of buying interest. It acts as a “floor” where demand is strong enough to prevent the price from falling further.

Resistance: Resistance is a price level where an uptrend is expected to pause or reverse due to a concentration of selling interest. It acts as a “ceiling” where supply overwhelms demand, preventing the price from rising further.

Candlestick patterns can help identify key levels of support (price floor) and resistance (price ceiling). For instance, a bullish engulfing pattern at a support level indicates a stronger likelihood of price reversal upward.

How to Use and Interpret Candlesticks at Support and Resistance

Candlestick patterns at support and resistance levels provide valuable signals about potential trend reversals or continuations. Here's how to interpret them effectively:

1. Candlesticks at Support:

When the price approaches a support level, traders watch for bullish candlestick patterns to confirm that the level will hold and the price may reverse upward. Some patterns to look for at support include:

• Hammer: Indicates that sellers initially pushed the price lower, but buyers stepped in, and the price closed near the open. This suggests a potential bullish reversal.
• Bullish Engulfing: A small bearish candle followed by a large bullish candle that “engulfs” it. This indicates strong buying pressure and a potential reversal.
• Morning Star: A three-candle pattern signaling a reversal from a downtrend. If a Morning Star appears at support, it indicates that selling pressure is weakening, and an uptrend might follow.

2. Candlesticks at Resistance:

When the price reaches a resistance level, traders look for bearish candlestick patterns to indicate that the resistance will hold, and the price may reverse downward. Common patterns include:

• Shooting Star: A small body with a long upper wick, showing that buyers tried to push the price higher but failed, signaling a bearish reversal.
• Bearish Engulfing: A small bullish candle followed by a large bearish candle, engulfing the previous one. This suggests strong selling pressure and a potential downward reversal.
• Evening Star: A three-candle pattern that indicates a bearish reversal. If this pattern forms at resistance, it signals that buying strength is fading.

3. Breakout vs. Reversal:

Candlesticks at support and resistance help traders determine whether these levels will hold or break:

• Reversal: If strong reversal patterns like a Hammer (at support) or Shooting Star (at resistance) appear, it's likely the price will reverse direction.
• Breakout: If no clear reversal pattern forms, and instead, the price closes decisively above resistance or below support, it signals a potential breakout. For instance, a large bullish candle breaking above resistance suggests a continuation of the uptrend.

4. Confirmation with Volume:

Volume is crucial for confirming the strength of candlestick patterns at support and resistance levels.

• High volume during a breakout strengthens the signal.
• Low volume during a breakout may suggest a false breakout, and the price could quickly reverse.