Polarity

1. Polarity

Polarity in technical analysis is a concept that identifies areas on a chart where price is likely to react due to previous significant price action. It's a powerful, yet often overlooked, method for identifying potential support and resistance levels, and can be used in conjunction with other Technical Analysis tools to increase the probability of successful trades. This article will delve into the intricacies of polarity, providing a comprehensive understanding for beginners, and exploring its practical applications.

What is Polarity?

At its core, polarity rests on the idea that significant price movements, particularly those accompanied by strong volume, leave an imprint on the market's collective memory. These imprints manifest as areas where future price action is likely to pause, reverse, or consolidate. The fundamental principle is that *what once was support becomes resistance, and what once was resistance becomes support*. This seemingly simple concept forms the basis for identifying high-probability trading opportunities.

Instead of simply drawing horizontal lines on a chart (as is often done with traditional support and resistance), polarity focuses on the *nature* of the price action that created those levels. A strong, impulsive move *through* a previous high or low is what defines the new polarity level. It’s not just *where* the price was, but *how* it got there that matters.

Think of it like this: if price forcefully breaks through a resistance level, it signifies a significant shift in market sentiment. Buyers have overcome selling pressure, and that previous resistance now represents a zone where buyers are likely to defend their positions – thus becoming support. Conversely, a strong break below a support level suggests a shift in sentiment towards bearishness, turning that previous support into resistance.

Types of Polarity

There are three primary types of polarity, each offering slightly different insights:

• Classic Polarity:* This is the most basic form. It identifies polarity levels based on significant swing highs and lows. A strong break of a previous swing high creates a new support level, and a strong break of a previous swing low creates a new resistance level. This is the foundation of the polarity concept and is easiest for beginners to identify. Look for clear breaks with substantial Volume confirming the move.

• Shift of Character Polarity:* This type focuses on changes in the *character* of the price action. For example, a slow, consolidating price action might suddenly break out with strong momentum. That breakout point, even if not a previous swing high or low, can become a polarity level. The 'character' refers to the speed and force of the price movement. A shift from consolidation to impulsive movement is a key indicator. This often requires a more nuanced understanding of Price Action.

• Equal Extremes Polarity:* This is arguably the most advanced type. It identifies polarity levels based on equal price extremes, even if they didn't result in a clear reversal. For instance, if the price reaches a specific level twice with similar volume and market context, that level may act as a polarity point. This requires careful observation and can be subjective, but it can reveal hidden support and resistance zones. This often works best in ranging markets. Understanding Chart Patterns helps with identifying these extremes.

Identifying Polarity Levels

Identifying polarity levels requires a systematic approach. Here's a step-by-step guide:

1. Identify Significant Swing Highs and Lows: Begin by marking the most prominent swing highs and lows on your chart. These are the points where the price clearly reversed direction.

2. Look for Strong Breaks: Focus on instances where the price decisively *breaks through* these swing highs or lows. A strong break is characterized by:

   *   Significant Volume: A substantial increase in trading volume accompanying the break. This confirms the move and indicates strong participation.
   *   Impulsive Movement:  A rapid and decisive price move, rather than a slow and hesitant crawl.
   *   Clear Candle Closes: Ideally, the breakout candle should close decisively beyond the previous high or low.

3. Mark the Polarity Level: Once you've identified a strong break, mark the level of the previous swing high or low. This is your polarity level.

4. Observe Price Reaction: Monitor how the price reacts when it revisits the polarity level. Look for signs of rejection, such as:

   *   Bullish Reversal Candles:  Doji, hammer, or engulfing patterns forming at the polarity level (when it’s acting as support).
   *   Bearish Reversal Candles: Shooting star, hanging man, or bearish engulfing patterns forming at the polarity level (when it’s acting as resistance).
   *   Volume Increase on Rejection:  Increased volume during the rejection phase confirms the strength of the polarity level.

5. Consider the Timeframe: Polarity levels are more significant on higher timeframes (e.g., daily, weekly). Levels identified on lower timeframes (e.g., 5-minute, 15-minute) are often less reliable and should be used in conjunction with higher timeframe analysis.

Polarity and Trading Strategies

Polarity levels can be integrated into various trading strategies. Here are a few examples:

• Breakout Strategy:* Trade in the direction of the breakout. When the price breaks through a polarity level, enter a long position (if breaking above resistance) or a short position (if breaking below support). Use a stop-loss order placed just below the polarity level (for long positions) or just above it (for short positions). Employ Risk Management techniques to protect your capital.

• Reversal Strategy:* Look for price to retest the polarity level after the breakout. When the price retraces to the polarity level, enter a trade in the opposite direction of the initial breakout. For example, if the price broke above resistance (now support), wait for a retest of that level and then enter a long position. Use candlestick patterns and volume to confirm the reversal. This aligns with Contrarian Investing.

• Polarity as Confluence:* Combine polarity levels with other technical indicators and tools, such as Fibonacci Retracements, Moving Averages, and Trendlines, to identify areas of confluence. Confluence occurs when multiple indicators point to the same level, increasing the probability of a successful trade. Consider using a Bollinger Bands strategy in conjunction.

• Polarity and Support/Resistance Zones:* Use polarity levels to refine traditional support and resistance zones. Polarity levels provide a more precise and dynamic understanding of potential turning points.

Advanced Considerations and Common Mistakes

• False Breaks:* Be wary of false breakouts, where the price briefly breaks through a polarity level but quickly reverses. Always confirm breakouts with volume and look for sustained momentum. Use Average True Range (ATR) to assess volatility and potential for false breaks.

• Timeframe Alignment:* Ensure that polarity levels align across multiple timeframes. A polarity level that is confirmed on a higher timeframe is more reliable than one that appears only on a lower timeframe.

• Market Context:* Consider the overall market context. Polarity levels are more likely to be effective in trending markets than in ranging markets. Utilize Elliott Wave Theory to understand market context.

• Dynamic Polarity:* Polarity levels are not static. They can shift and evolve as the market changes. Continuously monitor and adjust your polarity levels as new price action unfolds.

• Subjectivity:* Identifying polarity levels can be somewhat subjective, especially with Shift of Character and Equal Extremes Polarity. Practice and experience are key to developing your ability to accurately identify these levels.

• Don’t rely on polarity alone: Polarity is a powerful tool but should always be used in conjunction with other forms of Technical Indicators and Fundamental Analysis.

• Understand Market Sentiment : Pay attention to news events and economic data releases that could impact market sentiment and potentially invalidate your polarity levels.

• Consider Order Flow : Analyzing order flow data can provide valuable insights into the strength of polarity levels and the potential for breakouts or reversals.

• Explore Ichimoku Cloud : The Ichimoku Cloud can be used to identify potential polarity levels and confirm trade signals.

• Utilize VWAP : Volume Weighted Average Price (VWAP) can help identify areas of significant buying or selling pressure, reinforcing polarity levels.

• Study Harmonic Patterns : Harmonic patterns often align with polarity levels, providing additional confirmation for trading opportunities.

• Apply Renko Charts : Renko charts can filter out noise and highlight significant price movements, making polarity levels easier to identify.

• Implement Heikin Ashi : Heikin Ashi charts smooth price action and can help visualize polarity levels more clearly.

• Use Keltner Channels : Keltner Channels can help identify volatility breakouts and confirm polarity levels.

• Analyze MACD : The Moving Average Convergence Divergence (MACD) can provide insights into momentum and potential reversals at polarity levels.

• Track RSI : The Relative Strength Index (RSI) can help identify overbought or oversold conditions at polarity levels.

• Monitor Stochastic Oscillator : The Stochastic Oscillator can confirm potential reversals at polarity levels.

• Leverage Pivot Points : Pivot points can be used to identify potential support and resistance levels, complementing polarity analysis.

• Employ Donchian Channels : Donchian Channels can help identify breakout opportunities and confirm polarity levels.

• Investigate Parabolic SAR : Parabolic SAR can signal potential trend reversals at polarity levels.

• Examine Williams %R : Williams %R can provide insights into overbought or oversold conditions at polarity levels.

• Utilize Chaikin Money Flow : Chaikin Money Flow can help identify buying or selling pressure at polarity levels.

Conclusion

Polarity is a valuable concept for traders of all levels. By understanding the principles of polarity and learning to identify polarity levels, you can gain a deeper understanding of market dynamics and improve your trading performance. Remember to practice consistently, combine polarity with other technical analysis tools, and always manage your risk effectively.

Start Trading Now

Sign up at IQ Option (Minimum deposit $10) Open an account at Pocket Option (Minimum deposit $5)

Join Our Community

Subscribe to our Telegram channel @strategybin to receive: ✓ Daily trading signals ✓ Exclusive strategy analysis ✓ Market trend alerts ✓ Educational materials for beginners