Previous Major Highs and Lows in Trend Trading
Previous major highs and lows are one of the most common and reliable support/resistance levels. They work because they’re visible without traders having to use any particular indicator. They’re obvious to everyone looking at a price chart. Support/resistance levels work because the masses of people trading the market respond to them.
A major previous price high or low is simply one that stands out so prominently on a chart that almost anyone looking at it sees it as a significant high or low. There’s no objective method for identifying it.
The fact that the masses of traders see the major highs and lows makes them significant. When the market approaches those price levels, traders see that the market wasn’t able to go higher or lower than that level and are concerned that such levels represent prices that are too high/low for other traders to be interested.
The following figure illustrates how the market can approach a clearly visible previous high and find resistance. Traders will often sell at such a level because they realize the market participants previously felt that price level was too high and, therefore, may again be unsustainable. The previous high may provide long-term or short-term resistance.
For day traders, another pair of major support/resistance levels is the previous day’s high and low. You should always have those levels drawn on your charts because the vast majority of other traders watch them and therefore often buy or sell at those levels.