Support and resistance levels are simply prices at which the people trading the market feel that the market likely won’t pass through easily. Support levels are prices that traders feel the market is unlikely to go below. Resistance levels are prices that traders feel the market is unlikely to go above.
IMPORTANCE OF SUPPORT AND RESISTANCE.
Support and resistance levels are a critical part of trend analysis because it can be used to make specific trading decisions and identify when a trend is about to reverse. For example, a trader might identify an upcoming support level and decide to start buying the stock as it approaches knowing that it will likely rebound higher. These levels both test and confirm trends and should be closely monitored by anyone using technical analysis. As long as the price remains between these two levels, the trend is likely to continue in the prevailing direction.
However, a break beyond support or resistance does not always indicate a reversal. For example, a breakout higher may be the start of a faster bullish trend and vice versa for a breakdown below trendline support. There is also an instance of ‘false breakouts’ when a price may breakout higher on low volume and then fall back into a price channel.
Traders should be aware of support and resistance levels and avoid placing orders at these major points since they’re usually characterized by a lot of volatility. If you feel confident about making a trade near these levels, it’s important to avoid placing orders directly at the level since they are rarely reached. This is because the price never actually reaches the whole number, but rather, flirts with the levels before rebounding. Traders may also place stops or short selling orders around these levels to capitalize on a breakdown or breakout.
How trader’s Use these Levels?
Buy at a support level.
Take profits at a support level if you’ve been short.
Short at a resistance level.
Take profits at a resistance level if you’ve been long.
In fact, the market is pretty Mystery. So be realistic and understand that the price bars won’t normally make a high or low precisely at the support or resistance line. Most of the time, the bars go a little beyond them or stop a little before them.
Factor’s to determine the strength of support and resistance.
1) How Many Times the Support or Resistance Line was Touched. Put another way, how many times the support and resistance line was tested and failed. The more times a support/resistance line was touched, the more likely price will retrace (not break through).
2) The First Time the Support or Resistance Line was Touched. It’s important to know when the support/resistance was created. Generally, the longer ago it was created, the more weight it has (price is more likely to retrace).
3) The Last Time the Support or Resistance Line was Touched. A wide span from the first time touched to the last time touched could indicate even greater support/ resistance, especially if the last time touched was recent.
4) Whether the line is a session high or low, overnight high or low or a previous session high or low. Any such high or low tends to add weight to support and resistance.
Knowledge of the strength of support and resistance could significantly improve your trading results. It’s something you definitely want to add to your trading arsenal.