03.2 Support and Resistance

Support and Resistance
  • Support and resistance represent key junctures where the forces of supply and demand meet
  • In the financial markets, prices are driven by excessive supply (down) and demand (up)
  • Supply is synonymous with bearish, bears and selling
  • Demand is synonymous with bullish, bulls and buying
  • Support and resistance is one of the most widely used concepts in trading.

  • Support and Resistance are like a floor and ceiling while the price is located between them.
  • The main objective is to help us knowing price trends, chart patterns and determining whether the trend is likely to continue or reverse.
  • Support and Resistance exist because traders have memories. They tend to repeat actions took place in the past.
  • Resistance is a price level where seller’s action is strong enough to interfere or reverse an uptrend. (Sellers overcome buyers)
  • Resistance can be drawn by a horizontal (or near horizontal) line connecting a few price tops.
  • Resistance also helps traders to decide when to sell.

  • Support is a price level where buyer’s action is strong enough to interfere or reverse a downtrend. (Buyers overcome sellers)
  • Support can be drawn by a horizontal (or near horizontal) line connecting a few price bottoms.
  • Support also helps traders to decide when to buy.

How to draw???
  • Its better to draw support and resistance lines by drawing horizontal lines through lower and upper edges of congestion areas rather than extreme points

  • When the price passes through resistance, that resistance could potentially become
  • The more often price tests a level of resistance or support without breaking it, the stronger the area of resistance or support is.

Trend Lines
  • To draw trend lines properly, all you have to do is locate two major tops or bottoms and connect them.

Channels
  • If we take the trend line theory one step further and draw a parallel line at the same angle of the uptrend or downtrend
  • We will have created a channel

The Bounce
  • One method of trading support and resistance levels is right after the bounce.

The Break
  • There are two ways to play breaks: the aggressive way or the conservative way.
    – The Aggressive Way
    – The Conservative Way

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