Time to look at what resistance is! You ready? Let’s go!
As you might have guessed, resistance is a price area on the chart above the current price.
So, at times prices will reach the resistance area and rebound downwards as the bears will find the high prices attractive and enter the market aggressively with sell trades!
Now, a strong downtrend is defined by a series of successively lower tops and lower bottoms. Imagine for a moment that during the downtrend a new top is formed near the previous one.
How do you feel about it? How do you feel about the “health” of the downtrend? Not sure?
If that happens then it may be an early warning that the downtrend is coming to an end and the market is entering a sideways direction, and it’s important to know so you are aware of the potential risks!
In this case, the trendless sideways market is not ideal to place a sell or a buy order.
Also, a violation of the last top during a downtrend may be a warning for an impending reversal to the upside. This is probably a signal to close any sell trades and book any potential profits or losses.
One more example using an uptrend this time.
Remember, that an uptrend is defined as a series of successively higher tops and higher bottoms? Perfect!
Now, say that prices fail to rally higher to form a higher top as expected in an uptrend and instead they find resistance at the last top and rebound to fall below the last bottom.
This shows that the rally has just come to an end, and also signals the very early stage of a new trend in the opposite direction.
What do you do?
Close any buy trades and place perhaps a sell order!
Now you know what resistance is!
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