INVESTMENTS
SUPPORT AND RESISTANCE INDICATOR
What is Support and Resistance?
Levels of resistance and support are significant moments when supply and demand collide. Technical analysts believe that these levels of support and resistance are critical in figuring out supply and demand as well as market psychology. The supply and demand dynamics that generated these levels are thought to have shifted when these support or resistance levels are broken, in which case new levels of support and resistance will probably be produced.
What does Support Means?
The point at which demand becomes sufficiently strong to prevent further declines in the stock price is known as support. As seen in the above figure, the price finds it tough to break through the support level each time it hits it. The reasoning for this is that buyers (supply) become less ready to sell and sellers (demand) become more motivated to purchase when the price declines and approaches support.
What does Resistance Means?
The point at which supply is sufficient to prevent the stock from rising is known as resistance. As you can see in the accompanying figure, the price finds it difficult to move higher each time it hits the resistance level. The reasoning for this is that buyers (demand) become less eager to buy, and sellers (supply) get more motivated to sell, as the price increases and approaches resistance.
KEY KNOWLEDGE
Psychology of Support & Resistance:
Every time period included in the charting process—daily, weekly, and monthly—has support and resistance. Smaller time frames, such as one-minute and five-minute charts, can also be used by traders to identify support and resistance. However, the support or resistance becomes more substantial over a longer period of time. You must go backward in time on the chart to locate a notable stop in a price decrease or increase in order to determine support or resistance. Then watch to see whether, when it gets closer to that level, a price stops and/or reverses. As previously mentioned, a lot of seasoned traders will keep an eye on previous support or resistance levels and position themselves in case a like response occurs at these levels in the future.
Since technical analysis is not a precise science, prices occasionally fall below support levels or reverse before reaching the previous level of support. The same is true of resistance: The price may break above the previous resistance level or revert before it reaches it. It is necessary to be flexible when reading these chart patterns in each situation. For this reason, zones are sometimes used to describe degrees of support and opposition.
These pricing points don't have any special qualities. The truth is that a large number of market players are making comparable trade placements based on the same information.
The other side of the coin is support levels. The price level on a chart when equilibrium is attained is referred to be support. This indicates that supply and demand have grown to balance. This stops the asset's price drop, indicating that the price has reached a floor. The price floor is represented by the horizontal line below price, as you can see in the figure below. The blue arrows under the vertical line show you that the price has already hit this level four times. At this point, demand intervenes to stop further reductions. This is assistance.
Trendlines:
Three types of Trendlines they are:
Uptrend:
The aforementioned examples demonstrate how an asset's price cannot move higher or lower while it is at a constant level. One of the most prevalent types of support or resistance is a static barrier, however as the price of financial assets typically moves either way, it is normal to observe these price barriers shift over time. For this reason, understanding trends and trendlines is crucial when studying support and resistance.
Resistance levels emerge when price activity pauses and begins to retrace its path toward the trendline in an upward trending market. A price move that deviates from the dominant trend is referred to as a response. There are many other reasons why reactions could happen, including as profit-taking or short-term uncertainty over a given problem or industry. A short-term top is formed when the ensuing price movement has a "plateau" effect, or a minor decline in stock price.
Downtrend:
A downtrend line has a negative slope formed by connecting two or more high points. The second high must be lower than the first for the line to have a negative slope. Note that at least three points must be connected before the line is considered a valid trend line.
Downtrend lines act as resistance and indicate that net supply (supply less demand) is increasing even as the price declines. A declining price combined with increasing supply is very bearish and shows the strong resolve of the sellers. As long as prices remain below the downtrend line, the downtrend is solid and intact. A break above the downtrend line indicates that the net-supply is decreasing and that a trend change could be imminent.
Sideways Trendline:
A sideways trend is the horizontal price movement that occurs when the forces of supply and demand are nearly equal. This typically occurs during a period of consolidation before the price continues a prior trend or reverses into a new trend.
How do you Validate a Trendline
The general rule in technical analysis is that it takes two points to draw a trend line and the third point confirms the validity.
Frequently Asked Questions
The basic trading method for using support and resistance is to buy near support in uptrends or the parts of ranges or chart patterns where prices are moving up and to sell/sell short near resistance in downtrends or the parts of ranges and chart patterns where prices are moving down
A trendline is a line drawn over pivot highs or under pivot lows to show the prevailing direction of price. Trendlines are a visual representation of support and resistance in any time frame. They show direction and speed of price, and also describe patterns during periods of price contraction
A straight line must connect two lows in an uptrend. A straight line must connect two highs in a downtrend. At least three highs or lows should connect the trend line to make it valid.
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