Support and Resistance Basics

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Basic conception of Support and Resistance

Support and resistance represent key junctures wherever the forces of demand and provide meet. even as a ball bounces once it hits the ground or drops when being thrown to the ceiling, support and resistance outline natural boundaries for rising and falling costs.

  • Supply is substitutable with pessimistic, bears and merchandising.
  • Demand is substitutable with optimistic, bulls and shopping for.

As demand will increase, costs move up and once offer will increase, costs decline. once offer and demand are equal, costs move sideways.

Support

Support is that the indicator at that demand is assumed to be robust enough to forestall the value from declining any. By the time the value reaches the damage, it’s believed that demand are going to be stronger than offer and forestall the value from falling below support. because the worth declines towards support, patrons become additional inclined to shop for and sellers dwindle inclined to sell.

Resistance

Resistance is that the indicator at that merchandising is assumed to be robust enough to forestall the value from rising any. because the worth reaches the resistance level, it’s assumed that offer are going to be stronger, sellers become additional inclined to sell and patrons dwindle inclined to shop for. By the time the value reaches the resistance level, it’s believed that offer are going to be stronger than demand and forestall the value from crossing the resistance.

Determining the strength of Support and Resistance levels

The strength or weakness determines what proportion shopping for or merchandising interest are going to be needed to interrupt the amount. The length of your time that a support or resistance level exists determines the strength or weakness of that level. Also, the bigger volume listed at any level, the stronger that level are going to be.

Please note

  • Support becomes Resistance and Resistance becomes Support on a breakdown / prison-breaking of a Trend-line.
  • Old Support becomes new Resistance and previous Resistance becomes new Support.

Reason for Support and Resistance to Exist

Support and Resistance exist because people/traders have memories. Each price point has certain memories associated with it. Please refer to the diagram below and check for the price point marked by the red arrow. Investors got trapped and remember this price point as a sheer pain and wait patiently to exit once the price point is reached in future. The price point marked by the green arrow is a sigh of relief for those investors who got trapped at the red arrow point earlier. Desperation shown by the previous buyers drags the price down in short term. Hence, the price level acts as a resistance for near future.

Break-down

It is the phenomenon where the prices move downwards breaking an important Support level in the process. Normally, a breakdown is supported by high volumes and it indicates a further downtrend in that stock.

Break-out

It is the phenomenon where the prices move upwards out of range breaking an important Resistance level in the process. Normally, a breakout is supported by high volumes and it indicates a further up move in the stock.

Key Takeaways

  • Support or Resistance represents a concentration of demand and supply sufficient to halt a price move, at least temporarily.
  • Potential Support/Resistance zones develop at previous high and lows, and close to Trend lines and moving averages, emotional points on a chart and Fibonacci retracements.
  • The strength or weakness of Support /Resistance zones is determined by how much buying or selling interest will be required to break the level. With respect to the length of time for which a Support or Resistance level exists, the greater volume traded at any level, the stronger that level will be.
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