The major basis of analysis for a price action trader are support and resistance .This sometimes can be seen to operate simultaneous as Event area.
The market has a good memories for these zones. Most times, major turning points in the market are fuel by these zones.
An event area (or zone) is a significant horizontal area on chart where an obvious price action signal formed OR from which a massive directional (up or down) move initiated (such as a massive sideways trading range breakout, for example). You can and should think of these event zones as a “hot spots” on the chart; a significant / important area on a chart that we should continue watching carefully as price retraces back to it in the future.
We have an expectation that next time / if price re-visits these event zones, the market will AT LEAST pause and ‘think’ about whether or not it will reverse direction there.
Support & resistance levels are obvious horizontal levels that are drawn on a chart connecting bar highs or lows that are at or near the same price level. These levels can remain relevant on the chart for days, weeks or years,
In the example below, notice there is not obvious price action signal and no strong breakout from consolidation or a level. These levels are just standard support and resistance levels being drawn in across bar highs and lows.
There are usually many more standard support and resistance levels than event zones on a chart, even on a daily chart time frame / higher time frame. The main point to understand about this fact, is that event-zones are more important since they reflect a major price event, whereas support and resistance levels can be drawn across smaller market turning points that are typically less significant.
See example below of standard support and resistance levels.
What are the main differences between the two?
The difference between an event zone and standard support and resistance level or area can seem quite subtle, but there is a distinction.
The easiest way to put it would be, every event-zone is also a support or resistance level / area, but not every support and resistance level is an event zone.
Here’s how you can differentiate the two…
An event zone has to either have a price action signal that led to a big move OR a major price breakout from a consolidation area or level. Let’s look at some chart examples to show this more clearly:
Below, we see a clear example of an event zone, it was an event zone because:
- It was the area on the chart where a major breakout occurred. Notice the long consolidation range before the breakout. Hence when that breakout finally occurred, it was a powerful price action “event”. This level on the EURUSD chart will likely remain relevant well into the future.
Event zones and support / resistance levels help define trade risk
Another important feature and benefit of event zones and support and resistance levels is that they help us define our risk on a trade. More specifically, they help us determine where to place our stop losses and how to know when the market has invalidated our trade idea.
You can obviously place a stop loss just beyond a support or resistance level, because if price violates that level, the thinking is that the market is changing and your original trade idea is now unlikely to work.
An event zone is often a more significant support / resistance area so it’s an even better barometer of trade risk than a standard level. If a market breaks past an event zone, you KNOW your trade idea is not working and market sentiment is severely shifting.
If you have a clear price action signal / pattern at an event zone, you can fine-tune your risk even more, because these signals are often very-high probability and hence we can place our stop loss at the high or low of the signal and often we can then enter on a retrace of the signal, on what I call a trade entry trick, which allows for huge potential risk reward trades:
Becoming a proficient price action trader is all about learning to skillfully interpret and properly utilize the footprint of money on the chart, this footprint is left behind as the price action plays out over time.
Culled from Learntotradethemarket