Technical Analysis: Polarity

The concept
of polarity states that once a support or resistance level gets breached it may
change its nature and become the opposite. So, for example, if a support gets
breached it may become resistance and if a resistance gets broken it may become
support.

This may
help you to structure your trades around such levels and limit your risk by
placing a stop loss below them. If you think that the direction of the trend is
upward, but the price has been stuck in a range for some time, you can wait for
it to first break out of the range, then pulling back to the old resistance and
then entering placing your stop loss below it. So, if the price goes back into
the range again, then your trade idea would be invalidated, and you would lose
only what you planned to in advance.

Polarity is
not precluded to support and resistance levels only though. In fact, you can
see it working on many other technical tools like for example moving averages
or trendlines. The trading thought process would be the same though, so you
would use these tools just to limit your risk in case your trades don’t work
out as expected. Below you can see an example with a moving average providing
support to the price first being in an uptrend and then providing resistance switching
to a downtrend.

This article
was written by Giuseppe Dellamotta.