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Hello, everyone, to the second lecture in Section 6.
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Very quickly, I want to go to a key error that support and resistance traders make while trading a breakout
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after a consolidation phase.
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It is very simple to understand, but it carries a significant importance in support and resistance
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trading during a sideways price activity. Therefore guys, you will never buy at support when market is
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making lower-highs in a consolidation phase.
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This means that the sellers are entering in large numbers as the market fails to reach the horizontal
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resistance zone that you plot.
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Once the first leg of the sideways price activity defines boundaries for initial support and
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resistance zone.
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Therefore, what you see here is repeated tests of the horizontal support.
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As price makes lower-highs, this price activity is associated to selling strength entering in the markets,
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hence giving an indication that price is highly likely to break out from the support zone and decline
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further.
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So when you see price making lower-highs in a consolidation phase, then you should plot a diagonal
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support to look for trade entries.
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No, we will study this guideline using examples.
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Here we are looking at 4-hour chart of gold.
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After a downtrend, price entered a consolidation phase on gold, then after first two legs of the price
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movement, the support and resistance zones are plotted on this chart.
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Now to study the guideline, which says to avoid buying when price makes lower-highs, notice how
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price fails to reach the resistance zone as it posts the first lower-high.
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I will use a trend line to draw a diagonal resistance here.
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Moving on, gold posted another lower-high after price bounced from the support, hence I will extend
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the diagonal resistance to the right on this chart.
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Guys, this diagonal resistance is signaling the control of sellers as buyers fail to push prices higher
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on gold and all the price touches on this
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diagonal resistance presented sell opportunities before price break out to continue the bearish trend.
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This is all that this guideline is about. Nw, let us study one more example on daily charts as well.
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Here we are looking at USDCAD.
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Once again, we are studying the same guideline.
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Here we are able to plot our support and resistance zones, once the first leg of sideways
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price movement ended.
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Once again, notice the lower-highs in this price range, signaling the selling strength.
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Once again, I will use a trendline to draw diagonal resistance on this this pair.
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And once the price breakout was recorded during the strong bearish candle, a sharp downtrend continued
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on this forex pair.
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So this is all you need to know when the market makes lower-highs within a consolidation phase.
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And let us continue studying then the opposite scenario.
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Similarly, when the market makes higher-lows in the consolidation phase, it signifies the buying strength
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in the market as sellers fail to push the price lower.
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In this case, you will avoid selling at the resistance zone as it is highly unlikely that the price
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will break out through the resistance zone in the later phases of sideways price activity.
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Now, let us study a final example to understand the guideline.
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Here we are looking at EURCAD to study the guideline.
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Price went into a consolidation phase from here, and we are able to see the support and resistance
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zones after this bearish candle.
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Now, notice, the higher-low starting from here, and finally, a sharp upward trend was recorded on
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this one forex pair.
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I will quickly draw a diagonal support to explain the buying strength associated to each higher-low.
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Guys, the guidelines you have studied here more often than not signal what is about to happen in the
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near future, so please study the price action carefully.
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This also concludes this lecture in Section 6 of the course.
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And I will see you in Section 7, where I explain very recent or present live trades that I took
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using this strategy with complete trade management.
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