Support and resistance levels are regions where prices find it hard to continue or break through. Price is likely to either reverse or consolidate.
When price is going high and then pulls back at a certain level, it has reached the resistance region.
When price is falling low and then pulls back at a certain level, it has reached the support region.
For example, when you bounce a ball high, it hits the ceiling and comes back to the ground. The force you used to bounce it, will still determine the number of times it bounces from the ground at several distances. For this case,the ground acts as our support level and the ceiling is the resistance level.
Likewise when the market is going high it reaches at a point where it finds it difficult to continue or break through, it either holds there for some time, changes it’s direction or breaks through. The same happens when price hits a support level.
The support levels
These are levels on the market chart below which the current market price finds it difficult to fall further. Price is likely to bounce as it approaches the support level or consolidate before it breaks through but has higher chances of bouncing than breaking.
Let’s look at the illustration below;
The above diagram shows price(red) bouncing off the support level.
At support, the sellers are discouraged to sell at a cheaper price as more buyers come in to buy at an attractive low price levels. This is what actually make the price to bounce. Buyers become more than sellers which stops price from falling further and drives the price up therefore good opportunity to buy. When the support level is broken, it indicates that the sellers are still strong compared to the buyers.
The resistance level
Resistance is the opposite of support ( the price ceiling)It is the level on the market chart above the current market price at which price finds it difficult to rise further.
At resistance, price is more likely to bounce back than to break through. Buyers are more reluctant to buy at high prices and sellers taking advantage of high prices to grab profits.
As a result, supply becomes greater than demand due to high selling pressure at high prices. This is a good opportunity to sell because prices are likely to move lower as more sellers come in.
How to draw support and resistance.
To draw a support and resistance level.,
- First identify at least two to three previous highs and lows, pin bars or the previous pivot points on the chart.
- Draw the line through to connect the three points
Let’s see how that is done in the illustration below.
Some of the facts about support and resistance.
- The more times price tests the support or resistance levels, the stronger it becomes.
- A break on the support shows that the selling pressure is stronger than the buying pressure and vice versa.
- When prices break below the support, the support becomes a new resistance and when it breaks above the resistance it becomes a new a support
- The longer the time frame used to determine the support and resistance line, the stronger the point and the greater the impact.
If you notice that price has been falling but reached a certain level and then starts to go back up, consider that area as a possible support, where the next time price gets to that level, it might get rejected again. If price bounces off again from the same level, then you can confirm the level as a support. This means that the price is likely to bounce off this level again and a gain in case price attempts to approach it. The same applies for resistance levels.
Let’s take a look at the chart below indicating support and resistance levels on the market chart.
The above example shows how price ranges between the levels of support and resistance and how it give you potential trade signals.
We buy when price is low at support and sell when price is high at resistance.
Taking a look at the above chart, you will be able to see how price respects these levels.
As price moved down, it found support with a long pin bar,hammer, giving us our first buy signal as identified by the circle and market Buy 1. It rallied back upward, and found resistance above as circled with black. Like we mentioned before, at support, price is more likely to reverse than break through. Therefore if you had taken your first trade, this would be the right time to exit trade.
As price bounces off the resistance, it gives us a second signal for a sell(sell 2). Exit would be the next support level. We do the same for other positions taken when trading support and resistance. Buy low at support and sell high at resistance.
How long you should hold an open position, is a personal thing for all traders. The decision is all yours. You know what your goals are as a trader, the kind of strategy you use to trade. All this starts from what you are? and What you want? If I am to answer, this...