Previous levels of support and resistance are yet another way that price gives us very useful information about the next move of the market.
They are areas that the price has previously reacted to and they are also the most powerful form of support and resistance you can get.
When trying to calculate such a level you only need to remember one thing from this whole section:
Price remembers BIG and price remembers RECENT.
This means that you mainly need to look for two types of previous Support & Resistance, firstly, places on the chart where there was a major reaction i.e. price hit the level and was instantly repelled by the level all within one or two candles on the chart. These BIG reactions are easy to see on a chart and price will remember these levels even quite far into the future.
Here is an example of a big reaction:
Notice how quickly price was rejected, there was no hesitation, this is what a big reaction looks like and these reactions are remembered by the price well into the future.
If price approaches this level again in the future the chances are that there will be at least a small reaction from this area.
You can test this by simply plotting some horizontal lines onto your price chart at levels where you see reactions like this and scroll forward to see what actually happened as price hit them again.
The odds of there being another reaction from this level are vastly increased if there are also other levels of support and resistance overlapping with it such as Fibonacci retracements or pivot points, this overlapping is what is known as a confluence of factors.
The word confluence will be mentioned frequently as you make your way through this course because this is the best way to ensure each trade that you take is of the highest quality.
Let’s take a look at a confluence around an area that experienced a big reaction in the past:
In the example above you can clearly see that initially the price has a major reaction from a certain level (back line) as it acts as a solid support area.
Eventually price manages to break down below this level and as it comes back up towards it there is now a 38.2% Fibonacci retracement level overlapping with the original level that used to be support which now acts as resistance and pushes price back down.
It’s important to note that this is just an example, and it doesn’t have to be old support that you look to become resistance, if you have an old resistance level that has a new confluence of things overlapping with it you can consider this level to act as resistance again in the future.
The power is all in the confluence, so if you have a nice big reaction and price approaches it again in the future but there is no real confluence of other things overlapping with it you would be better off staying out and waiting for a better set up.
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