Support and Resistance is one of the most fundamental parts of trading. By pairing candlestick formations with support and resistance levels, traders can make better buy and sell decisions. Not to mention there are numerous other techniques one has to use to make much better trading decisions.
What exactly are support and resistance?
Support and resistance are essentially imaginary lines or zones on the trading chart.
An upward movement of a price trend is arrested when it hits resistance. Resistance hence is the psychological line or zone that restricts the movement of price from crossing it.
A downward movement of a price trend bounces back when it hits support. Support then would mean that psychological line or zone that prevents the downward trend from continuing.
A support zone or a resistance zone can let the trend slide along it or increase or decrease the trend accordingly. As the trend oscillates from the highest price to the lowest price, the regions of support and resistance keep on getting formed.
In the figure above we can mark various zones of resistance and support throughout the progression of the trend. We do notice slight breaches of the lines. Support and resistance are not exact numbers. But are zones with a range of values. The market tests the validity of a resistance or support through slight breaches.
The highs and lows are often ‘knee-jerk’ reactions and are hence not much reliable when identifying the zones of resistance or support. Rather, the closing and opening prices are more reliable. Still, there are times the closing or opening price breaches the support/resistance lines. Hence it is recommended to view resistance/support as zones than as lines.
Support for potential Buy Signal
When prices touch a historical level of support, generally prices will cease the negative momentum downward and reverse course. This triggers a potential buy signal, that is when price touches support.
Resistance as potential Sell Signal
When prices reach a historical price ceiling (resistance), in all probability, prices will stop at that level. This, of course, is not always true. When we have strong external factors that strengthen a bullish trend price breaks the resistance zone. Otherwise, it triggers a potential sell signal, that is when price touches resistance.
Breaking Support and Resistance
Another fundamental concept of support and resistance is that when a resistance is overcome, it starts to function as support. There is also the possibility of support turning to resistance when it is breached. Which would happen when external factors give rise to a bearish trend.
In the figure above $5750 served as a major resistance zone until it was breached and turned into support. Major zones are tested many times by the market and are hence authoritative. Minor zones are maintained for short amounts of the reference periods.
An all-time high offers resistance until it is crossed and similarly an all-time low acts as a support.
Trend lines are indicative of the overall direction of the price movement. To draw them, identify two major regions of support/resistance and join them.
An upward trend line is drawn by joining the regions of support. A downward trend line is drawn by joining the regions of resistance. When the trend line is parallel to the x-axis, it indicates a sideways trend.
After we have drawn the trend lines, it is very easy to draw the channel trends.
We have an ascending channel when we draw another line parallel to the uptrend line and when passing through the peaks. Similarly, we have a descending channel when we draw another line parallel to the downtrend line and when passing through the valleys.
Generally, the bottom of the channel is considered a buy zone while the top of the channel is considered a sell zone.Channels can be used to predict long-term price trends.
Candlestick charts in conjunction with support and resistance patterns can provide a basic snapshot of the price trends.
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