What is Support and Resistance?

Posted by John Kelvin on Oct 24, 2019 5:54:42 AM

SupportResistance

The purpose of price analysis is not to accurately predict the future, but to improve the ability to forecast correctly, more often than not. This is where Support and Resistance play a significant role. Support and Resistance are key levels where the forces of supply and demand meet. They are the foundation of technical analysis.

Let's illustrate this with an example: the bounce of a rubber ball. When thrown up in the air, it will drop after it hits the ceiling. Support and resistance are like a floor and a ceiling.

In order to understand price trends, you have to understand how support and resistance work. Rating their strength helps you decide whether the trend is likely to punch through or to reverse. There are different definitions for Support and Resistance, but to make it simple, we will give a clear definition for the two.

Support level. This is the level at which the price of an asset reverses back up after moving down, indicating a level for the bull to take a position to go long, or buy. Shown below:

Support1

 

Resistance level. This is the inverse of the support level. It is the level at which price pulls back or retraces back down after moving up, indicating that the bears are getting ready to sell the market (weakness in the part of the bulls). Shown below:

Resistance picture

 

When a trader decides to trade these levels, there are some rules which a trader needs to keep in mind while trading this SR (support and resistance). They are the following:

1- If the support level is broken to the downside, it will turn into resistance in the future. On the other hand, if the resistance level is broken to the upside, it will turn into support in the future, vice versa. Support will turn into resistance (picture 1) and resistance will turn into support (picture 2). Old levels can come back to prove to be a good level of reversal. 

Picture 1:S1

Picture 2:r1

2- How long will these levels hold? The rule behind this is based on the principle of SR strength. The principle states that "The longer a support or resistance area is being tested (over time) the stronger it is".

3- The SR (support and resistance) levels indirectly tell the traders when to buy or sell.

4- They provides clear levels of stop losses.

As support and resistance levels grow very old, they gradually become weaker. In average timing, when the price hits the levels more than 3-4 times, the levels tend to become stronger.

What trading rules are advisable for traders?

1-  Identify the levels of support and resistance, whenever price approaches support or resistance, and tighten your protective stop.

2- Use reliable time frames. Time frames are another important part of technical analysis. Higher time frames are more reliable for viewing the levels of SR. When prices are viewed on higher time frames, it gives the trader more confidence on the next trade to open.

3- Support and resistance levels can also be seen not only on horizontal levels, but also through trendlines that can be drawn on a diagonal trend up or down. Shown below:

HubSpot Video

 

In conclusion, support and resistance levels are more like supply and demand. These support and resistance levels are seen to be crucial when determining market psychology. The support and resistance levels are not always horizontally spotted. In most cases they can also be a diagonal (shown above in the video). 

START TRADING Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. Traders should always make sure they carry out their own research before buying any idea given. The views expressed in this article are the author’s and may not represent the views of EMX.

 

 

 

 

Topics: Education