The Art & Science of Technical Analysis: Market Structure, Price Action & Trading Strategies

CHAPTER 4

On Trading Ranges

The heavy is the root of the light. The unmoved is the source of all movement.

—Daodejing (ca. 6 BCE)

Price action in trends is often not that difficult to read, as there are a number of patterns that give insight into the integrity of the trend at any moment; trading ranges are more complicated because price action in those ranges is much more random. The defining patterns of trading ranges are the tests of support and resistance near the confines of the range, but price action around support and resistance is complex. Much of the conventional wisdom about support and resistance is not correct, and many support or resistance levels used by traders are probably no better than any random level in the market. The study of trading ranges must begin with a careful look at support and resistance, with a willingness to question some long-held beliefs about these levels.

SUPPORT AND RESISTANCE

In their venerable bible of technical analysis, Edwards and Magee (1948; 4th ed., 1964) define support as “the price level at which a sufficient amount of demand is forthcoming to stop, and possibly turn higher for a time, a downtrend”; they give the inverse definition for resistance. The idea is that, as price declines, lower prices will naturally find more willing buyers. At some point, price declines far enough that buyers are willing to soak up all the sell orders in the market, and the market will stop going down. This theoretical concept is sound, but there is ...