SUPPORT & RESISTANCE

 

Support & Resistance

Day traders use several. There are many approaches that traders use to find a good buying and selling opportunity. Some of the most popular and simple is using “Support and resistance” in technical analysis as the backbone of price action.

Other strategies include, news trading, scalping, arbitrage, momentum or trend-following, etc.

Each strategy is unique having a different approach on how to analyze the market, but a fundamental similarity, in all these strategies, is to identify support and resistance levels.

Amazingly, just as finger prints are different for each person, every trader will seem to have their own idea of how to trace support and resistance levels.

These levels form because of traders’ behavior- buyers believe the asset is undervalued and place buy orders, creating demand and thus price moves up while when sellers feel the asset is overvalued, they start selling thus increasing supply. This kind of traders’ market sentiment forms Psychology of Support and Resistance.

A support is a price market level where financial asset(s) struggle to move below while a resistance is a price where financial asset(s) find it difficult to move above. Support and Resistance levels can be drawn horizontally or diagonally.

Courtesy of https://realtrading.com/trading-blog/best-sr-indicators-tools/

When price breaks through support or resistance, it often signals a significant change in market direction.

1/. When price breaks Support: When support is broken, it can lead to a further price decline as it signals a shift in control from buyers to sellers. This signals to traders to place sell trades.

2/. When price breaks Resistance: When resistance is broken, it can lead to a price moving up/ price rally thus signaling that buyers have taken control. This is a bullish indication, and thus traders look to go long.

Courtesy of https://www.newtraderu.com/2021/05/08/what-is-support-and-resistance/

Courtesy of https://www.babypips.com/learn/forex/support-and-resistance

Courtesy of https://www.babypips.com/learn/forex/support-and-resistance

 

CONCLUSION

Support and resistance technique is fundamental in technical analysis that traders can use to identify potential price breakout, reversals and continuation in financial markets.

Support and resistance levels are only indicative of a possible breakout or reversal of prices, and thus traders should use it alongside other market analysis indicators while adjusting their trading strategies.