Understanding the Support & Resistance Levels
The concept of support and resistance levels is the most discussed attribute in technical analysis. It gives information regarding trends and reversals as the important aspects of technical monitoring. Support and Resistance levels assist the traders in gaining extra insight into the power of price trends.
These terms are often used by traders while analyzing chart patterns. Initially, the idea behind identifying support and resistance seems easy. However, the support and resistance come in various forms, making them complex to understand.
Support & Resistance: The two important points in time are support and resistance when the forces of supply and demand meet. Due to the high demand concentration or buying interest, support occurs where the downtrend is predicted to pause when the price of security drops. In a high concentration of supply or selling interest, the possibility of appearance resistance is increased where the uptrend is expected to pause temporarily when the price has increased.
Functions of Support and Resistance Concept In Technical Analysis
- Analysts use resistance and support levels to find the price point, where the probabilities of pause and reversal trend happen.
- Plays a major role in understanding market psychology to remember the past and respond to changing conditions to make the future move.
- Utilize support and resistance levels to predict entry and exit points.
- Shifting areas of resistance and support reveal the sentiments and emotions of individual market actions.
- Act as barriers and prevent the asset price from moving in a certain direction.
- To find the stop losses and targets, place the SL below the support for buying the stock and above the resistance for selling the stock and vice versa for the target point.
Psychology Behind Support and Resistance Bars
Usually, you will find three types of participants at any price level.
- Long one who waits a long time for raising the price.
- Short one who hopes the price will fall.
- One who hasn’t decided which way to trade stays on the sidelines.
- Support is the chart’s zone where the number of buyers is more than the number of sellers in technical terms. In simple words, the support level prevents the price from going down.
- In the support zone, stocks’ price goes up due to more buyers than sellers. It gives a strong indication to buy; when the cost of the stock falls and touches the support, something is likely to bounce back.
- The most interesting thing a trader needs to understand is that support is always positioned below the current market price.
- Another possibility is that price can further fall and break the support, so there is no rule about the support level; the trend has to go up in that direction.
- Maximum chances of falling price until the support combines and absorbs all the buy orders and starts going up again.
- The name indicates something to prevent, and in this case, the price goes high and halts it from rising. In technical factors, the resistance zone includes more sellers than the number of buyers.
- It acts as an indicator that points to sell when the number of sellers is more than the number of buyers.
- When the stock price touches resistance, it seems like a reversal trend from the resistance level.
- The important thing traders need to understand is that resistance is located above the current price.
- Another potential, the stock price keeps going upwards, breaking the resistance. More touches to the resistance level increase the chances of breaking the particular resistance.
Support To Resistance & Resistance To Support
The key notion of technical analysis is when resistance and support level is broken, and their roles are reversed. If the stock price drops below the support level, the level will become resistant. On the contrary, it will become support if the stock market price goes above the resistance level.
Understanding the concept of support or resistance reversing roles is the foundation of technical analysis. It provides the thought that supply and demand have shifted and causes breaching the level to reverse their roles.
Use With Trendlines
- The price barriers changes are quite common because the asset price trend is generally upward or downward. So, highlighted the support and resistance with horizontal and angled lines for clear prediction to make a decision.
- Price trend bouncing back in the same zone on different points in succession shows the market is struggling to break the area of S&R.
- In upward, the price makes higher highs and higher lows, whereas downward, the price makes the lower low and low highs. So, Connect the highs and lows during the trend and extend the line to find support and resistance.
- Provides visuals of how the market is moving and what it could do in the future.
Next, a common feature of S&R is the difficulty in moving beyond a round number like $50 or $100 per share. Most amateur traders tend to call or put at the whole number as they feel like the stock is at fair valued levels. Besides, the target prices or stop losses that retailers or large investment banks set are placed at round price levels rather than a fractional number. Due to numerous orders placed at the same level, these round numbers are strong price barriers as support or resistance.
Use With Moving Averages
- The most powerful technical indicator is moving averages that help predict trend direction and represent the support or resistance levels. There are many ways to use the moving averages.
- Using MA as support and resistance levels, it acts as dynamic as it doesn’t look like old horizontal support or resistance, although constantly changing based on the recent price action.
- A stronger moving average means the S&R is stronger, like 200-EMA acts as stronger support or resistance than 50-EMA.
- The bigger time frame is more effective for moving average support or resistance. For example, 200-day EMA on a one day frame is stronger than 200-day SMA on a 15 mins frame.
Support & Resistance are the price points on the chart and are used to identify the trade targets as well as stop losses. Moreover, S&R is a basic trading strategy crucial for technical observation while determining market psychology and use for risk management.
This concept is subject to the interpretation of the chart data as the technical analysis is not an exact science to give 100% accurate results. If you spend more time studying and practising technical research, you will find it more an art than a science.