Strategies · Lesson 4 · Beginner
Support, resistance and role reversal
You recognize valid support and resistance zones and use the retest after a break as an entry.
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Role reversal
If price breaks through a resistance, that resistance often becomes support on the pullback. This retest is one of the most reliable long entry zones after a breakout.
Work with zones, not with lines to the cent. The more often a level has been tested, the more attention sits there.
Find the lowest low, the levels form at such extremes.
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Test yourself
Price breaks above an old resistance and runs back to this level. What is that?
- Role reversal, the resistance now acts as support
- A sure sell signal
- A round number, so hard support
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The key points at a glance
- Broken resistance becomes support, broken support becomes resistance.
- Zones instead of exact lines, the more often tested the stronger.
- Round numbers are not real support, only stop clusters sit there.
- The retest after the break is one of the most reliable entry zones.
Deep dive
What makes a support zone strong: the four factors
Not every line is a real level. A level is an area where orders and attention gather, not an exact price. Draw the line across the edges of the congestion zones, not through the extreme wicks.
- How often the zone has been tested
- How much volume was traded there
- How tall and wide the zone is
- How long price lingered inside it
Retest instead of chasing the breakout
When price breaks above an old resistance, it often becomes support on the pullback. This retest carries less risk than the breakout itself: Bulkowski calls it a throwback and describes a second, cheaper entry with a tighter stop.
- Wait to see whether price comes back and the level holds
- Enter with a stop just below, for a better reward-to-risk
- A breakout without a rise in volume is often a false breakout
- Murphy's measuring implication gives you the first target
Why round numbers and anchoring mislead you
Round numbers are not hard support. At 20,000 or 100,000 there are mostly stop clusters that pull price in like a magnet and get pierced. Place your own stop slightly off to the side, not at the obvious extreme.
Support is not a price where a falling market automatically turns, it is a zone with visible buying power. In the XRP crash from December 2017 on, every price looked like a bargain, yet the price fell for over two years all the way to 0.10 dollars.
Sources: Murphy, Goodman, Elder
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