Horizontal Resistance Pattern
Description
A horizontal resistance is a price level where an uptrend can be expected to pause due to a concentration of supply. As the price of an asset increases, the desire to sell also increases, forming the resistance line. This pattern is essentially the opposite of horizontal support.
How to Identify
- Look for a clear upward trend in the price action.
- Identify at least two points where the price has hit a similar level and reversed.
- The more times the price touches and rejects from this level, the stronger the resistance.
- The resistance line should be relatively horizontal (flat).
Trading Strategies
Reversals
Enter a short position when the price approaches the resistance level and shows signs of reversing.
- Entry: When price touches the resistance and starts to move downward
- Stop Loss: Just above the resistance level
- Take Profit: Previous swing low or support level
Breakouts
Enter a long position if the price breaks above the resistance level, as this often indicates a continuation of the uptrend.
- Entry: When price closes above the resistance level
- Stop Loss: Just below the broken resistance level
- Take Profit: Next resistance level or a predetermined risk-reward ratio
Risk Management
Always use stop-loss orders to protect against unexpected market moves. The strength of the resistance level can be gauged by the number of times it has been tested. However, remember that resistance levels can be broken, especially in strong trending markets or after significant news events.
Example
In this example, we can see a clear horizontal resistance level that has been tested multiple times. Each time the price approaches this level, it reverses downward, demonstrating the strength of the resistance.