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.
