Support and Resistance Explained
WHAT IS SUPPORT AND RESISTANCE
Trading support and resistance is like playing a game of tug-of-war between buyers and sellers in the market.
Imagine a group of people trying to pull a rope from opposite sides. If one side is stronger, they will pull the rope in their direction. In trading, the buyers and sellers are like these people pulling on the rope.
Support is like the floor of a room. It's the level at which the buyers come in and start buying a stock, because they believe that the price won't go lower than that level. So, if the stock price drops to the support level, it's like the buyers have put a floor on the price and won't let it go lower.
Resistance is like the ceiling of a room. It's the level at which the sellers start selling a stock, because they believe that the price won't go higher than that level. So, if the stock price goes up to the resistance level, it's like the sellers have put a ceiling on the price and won't let it go higher.
Traders use support and resistance levels to make decisions about when to buy or sell a asset. If the price is approaching a support level, a trader might decide to buy the asset, because they believe that the buyers will come in and push the price back up. On the other hand, if the stock price is approaching a resistance level, a trader might decide to sell the stock, because they believe that the sellers will push the price back down.
Remember, support and resistance levels are not always exact, and the asset price can break through them if there is enough buying or selling pressure. But they can still be useful tools for traders to make informed decisions.
Identifying Support and Resistance
🔷Look for areas where the price has previously turned around: This is one of the most common methods to identify support and resistance levels. You can look at a price chart and identify areas where the price has bounced back from in the past. These areas can become support or resistance levels in the future, depending on the direction of the price movement.
🔷Use trend lines: Trend lines are lines drawn on a price chart that connect the highs or lows of the price movement. A trend line connecting the higher highs can be a resistance line, while a trend line connecting the lower lows can be a support line.
🔷Pivot points: Pivot points are calculated using the previous day's high, low, and close prices. These levels can act as potential support and resistance levels for the current day's trading. You can find pivot point using Tradingview built in "More Technicals tools"
🔷Moving averages: Moving averages are used to smooth out the price action and identify the overall trend. They can also act as support or resistance levels, depending on where the price is in relation to the moving average.
🔷Fibonacci retracements: This method uses Fibonacci ratios to identify potential support and resistance levels. The levels are calculated by dividing the vertical distance between two significant price points by the key Fibonacci ratios (38.2%, 50%, and 61.8%).
It's important to note that support and resistance levels are not exact and can sometimes be broken. So, it's essential to use other indicators and confirm the levels before making any trading decisions.
Here are some other key facts about support and resistance that you may find useful:
🔸Support and resistance levels can switch roles: When a support level is broken, it can turn into a resistance level, and vice versa. For example, if a stock price breaks through a resistance level, that level can become a support level for future price movements.
🔸Multiple support and resistance levels can exist: A price chart can have multiple support and resistance levels at the same time, depending on the time frame and the volatility of the market. Traders can use different levels to make informed decisions about buying or selling a stock.
🔸Volume can confirm support and resistance levels: High trading volume at a support or resistance level can confirm its validity. For example, if a stock price bounces off a support level with high trading volume, it's a sign that there is buying pressure at that level.
🔸Support and resistance levels are not exact: As I mentioned earlier, support and resistance levels are not exact and can be broken. Traders should use other indicators, such as trend lines, moving averages, and candlestick patterns, to confirm the levels before making any trading decisions.
🔸Support and resistance levels can be influenced by external factors: Economic events, news releases, and market sentiment can also influence support and resistance levels. For example, a positive earnings report can break through a resistance level, while negative news can break through a support level. Traders should keep an eye on these external factors to adjust their trading strategies accordingly.
Trading support and resistance is like playing a game of tug-of-war between buyers and sellers in the market.
Imagine a group of people trying to pull a rope from opposite sides. If one side is stronger, they will pull the rope in their direction. In trading, the buyers and sellers are like these people pulling on the rope.
Support is like the floor of a room. It's the level at which the buyers come in and start buying a stock, because they believe that the price won't go lower than that level. So, if the stock price drops to the support level, it's like the buyers have put a floor on the price and won't let it go lower.
Resistance is like the ceiling of a room. It's the level at which the sellers start selling a stock, because they believe that the price won't go higher than that level. So, if the stock price goes up to the resistance level, it's like the sellers have put a ceiling on the price and won't let it go higher.
Traders use support and resistance levels to make decisions about when to buy or sell a asset. If the price is approaching a support level, a trader might decide to buy the asset, because they believe that the buyers will come in and push the price back up. On the other hand, if the stock price is approaching a resistance level, a trader might decide to sell the stock, because they believe that the sellers will push the price back down.
Remember, support and resistance levels are not always exact, and the asset price can break through them if there is enough buying or selling pressure. But they can still be useful tools for traders to make informed decisions.
Identifying Support and Resistance
🔷Look for areas where the price has previously turned around: This is one of the most common methods to identify support and resistance levels. You can look at a price chart and identify areas where the price has bounced back from in the past. These areas can become support or resistance levels in the future, depending on the direction of the price movement.
🔷Use trend lines: Trend lines are lines drawn on a price chart that connect the highs or lows of the price movement. A trend line connecting the higher highs can be a resistance line, while a trend line connecting the lower lows can be a support line.
🔷Pivot points: Pivot points are calculated using the previous day's high, low, and close prices. These levels can act as potential support and resistance levels for the current day's trading. You can find pivot point using Tradingview built in "More Technicals tools"
🔷Moving averages: Moving averages are used to smooth out the price action and identify the overall trend. They can also act as support or resistance levels, depending on where the price is in relation to the moving average.
🔷Fibonacci retracements: This method uses Fibonacci ratios to identify potential support and resistance levels. The levels are calculated by dividing the vertical distance between two significant price points by the key Fibonacci ratios (38.2%, 50%, and 61.8%).
It's important to note that support and resistance levels are not exact and can sometimes be broken. So, it's essential to use other indicators and confirm the levels before making any trading decisions.
Here are some other key facts about support and resistance that you may find useful:
🔸Support and resistance levels can switch roles: When a support level is broken, it can turn into a resistance level, and vice versa. For example, if a stock price breaks through a resistance level, that level can become a support level for future price movements.
🔸Multiple support and resistance levels can exist: A price chart can have multiple support and resistance levels at the same time, depending on the time frame and the volatility of the market. Traders can use different levels to make informed decisions about buying or selling a stock.
🔸Volume can confirm support and resistance levels: High trading volume at a support or resistance level can confirm its validity. For example, if a stock price bounces off a support level with high trading volume, it's a sign that there is buying pressure at that level.
🔸Support and resistance levels are not exact: As I mentioned earlier, support and resistance levels are not exact and can be broken. Traders should use other indicators, such as trend lines, moving averages, and candlestick patterns, to confirm the levels before making any trading decisions.
🔸Support and resistance levels can be influenced by external factors: Economic events, news releases, and market sentiment can also influence support and resistance levels. For example, a positive earnings report can break through a resistance level, while negative news can break through a support level. Traders should keep an eye on these external factors to adjust their trading strategies accordingly.
C Nicholas Downie
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