In technical analysis, support and resistance lines are core indicators. They assist in identifying pivotal price points in the movement of an asset where a reversal can be expected. These assist in understanding the underlying mechanics of the traders’ psyche and price action and are useful in making trading decisions. For anyone who seeks to perfect the art of technical analysis, supporting and resisting concepts is one of the first things they have to grasp.
In technical analysis, support and resistance are the most practical approaches to describe horizontal lines drawn around prices on a chart, which indicate forces that are expected to limit the price of an asset moving past the marked points.
Support is a price level where there is a considerable likelihood for demand to hold up the price of an asset from depreciating any further. More like the lower limit to a range. As an asset price approaches the support level, many buyers expect that the price will be as low as possible. In most cases, when this buying pressure exists, there is not enough selling to keep pushing the price downward and the price recovers.
In fundamental terms, support is a price where demand exceeds supply, and is also a price at which the traders are likely to buy because of the perceived value of the asset.
The other way around, resistance refers to the price level where selling pressure is sufficiently strong to inhibit further price increases. It is the upper bound of a range. The vicinity of the resistance price of an asset is one price where its holder has got tired of holding and in anticipation of the price turning or reaching that level, the traders begin to sell the asset. They are created, as a rule, in the levels where the sale volume was considerable in the past.
Thus, resistance is a price level in which supply dominates over demand, and usually, after that level is hit, prices tend to level off or reverse.
Support and resistance are not just market price levels. They are integrated with the consolidated view of all market participants. Support is the area that is characterized mostly by more successful bulls than bears, hence the price tends to increase. Resistance is the opposite: it is the area where there is more willingness to sell than to buy, so the price action tends to be flat or move downwards. Such support and resistance blocks help traders in their trading and provide reasons as to why prices at certain levels tend to do what they do.
Support and resistance levels are extremely important tools for risk management. They assist traders in assessing where their stop-loss orders should be placed as well as how much the trader should expect to earn realistically. If you want to buy close to a particular support level, for instance, you can set a stop-loss order at or around the level because it is reasonable to assume that the price will not go even lower. In the same way, when at or close to resistance, the targets of price have a fair value and the traders can measure whether the anticipated reward is worth the risk taken.
Support and resistance levels do not remain unchanged; as the market progresses, they also move. There’s a special time when a price breaks through a predetermined support or resistance level, called a breakout, and it shows that a new chronology of events is beginning. When a certain resistance level is surpassed, that level subsequently becomes a support level and the same goes for when a support level is broken. Knowing this support and resistance tendency explains to traders how to adjust their strategies to the way the market changes and helps them take advantage of fresh trends increasing their chances of making successful trades.
Support and resistance lines are also useful in trend identification. If an asset keeps on staying above a support level, it is probably in an uptrend. On the other hand, if the prices consistently do not go above the resistance, it means that a downtrend or range market may ensue. In this way, traders can adjust in a such manner that their strategies are in line with those support and resistance patterns and thus diminish the chances of going against the market.
Support and resistance, like most technical analysis concepts, should not be used alone. For instance, in case price is heading towards the resistance level and an RSI shows overbought conditions, a reversal is expected. Traders raise the proportion of successful transactions with the help of the support and resistance methods of combining several indicators.
Support and resistance lines are very useful in explaining the price action as well as the structure of the market. They are also useful in gauging market psychology, risk, and trend sighting. These lines also add to other technical elements giving the trader more information about the market. Through support and resistance, traders can have a well-structured approach in the market thus enhancing their chances of winning.
Enroll Now for our Trading With Data Science Program!
If you want to know more about Risk Management & Intraday Trading Strategies you can refer to our previous blog on
Importance Of Risk Management In Trading and 10 Best Intraday Trading Strategies.
Open a Demat Account using our link to get support from us – https://bit.ly/3gyhIWN and send your ID to [email protected]
Happy Learning!
