Support and Resistance

Apr 07, 2020

In stock market technical analysis, the point where price levels cease to progress is called support or resistance. Support and resistance happen to be one of the most used and trusted technical analysis methods. These terms have enjoyed countless debates as far as technical analysis is concerned. First, they look simple to deduce. But, as the time goes, traders find these terms difficult to understand, considering they come in diverse patterns.

In this article, our major talking points include the definitions of support and resistance indicator in technical analysis and some other related terminologies. Read on. Support and Resistance form part of analyzing chart patterns. They are used by traders to refer to the price levels represented on charts that function as barriers. Therefore, they disallow the price of an asset from moving in a particular direction.

There is no default indicator to indicate a change in dynamic demand and supply. If the trend progresses more than a point in an area and reverses from a series of points, then it is a support zone or resistance zone.


Support

In a lame man's language, support means keeping a system from falling. However, in technical analysis, the concept of support means any price point that is responsible for sustaining the price of assets from falling further. The demand is higher than supply at supports. There are pivot points in the market traders take into consideration, and these are horizontal support and resistance indicator, or they occur manually.

How to Identify Support

There are numerous technical tools out there that allow traders to make good use of support and resistance levels in the market. Consequently, they remain two of the most wide-spread trading strategies when trading the financial markets. From our elementary study of chart, if a line connects more than three reversal points, then the line is called a support line. Traders tend to use this chart as a reference as they trade on.

Support Zone

Expert traders employ technical analysis to recognize support zones. Once the price of a security falls to a predicted support level, a support zone or zone of support has been reached. Usually, the support zone occurs in proximity to a support trend line. It can be a terminable point on a technical chart. However, if a trader keeps on trading security, the support trend line’s price remains active.

Resistance

Resistance means the act of resisting or the capacity to oppose a change. For the seek of this study, it is a part of analyzing chart patterns, and this term is used by traders to refer to price levels on charts that tend to act as barriers and prevent the price of an asset from getting pushed in a particular direction. Resistance occurs where a downtrend is expected to cease. It is what happens when there is a concentration of demand. An uptrend is bound to occur to stop tentatively due to the high rate of supply.

How To Identify Resistance

If, in an illustration, a line kisses more than three points in reversal points, then the line is called a Resistance line, and traders tend to use this chart as a reference in the long run. Trend lines can identify the resistance level.

If traders find stock prices moving between support and resistance levels, then a fundamental investment strategy generally adopted by traders is to buy a stock at support and sell at resistance, then short at resistance and cover the short at support.

Resistance Zone

Resistance zones identify the cluster of resistance points, which rises and falls within the group in an area. Why price gets resisted by a bunch of points is beyond traders' understanding. Resistance zone is a zone that exists along with up or down trend lines but is not only seen at particular prices.

Support Resistance Indicator

Support and resistance happen to be some of the oldest technical analysis methods that traders use, whether as a Forex trader, Future trader, or any other market.

The price action points out the static supports and resistances quickly. But, the supply and demand are not stable, and as a result, they vary dynamically at different instances and different periods. To traders, it is cumbersome to identify these supply and demand zones, which supports and resists price action utilizing simple methods. Indicators, including moving average, Fibonacci tools, and pivot points, point out supply and demand zones at specific instances and timeframes. This identification is contingent on the trend, and hence known as support and resistance indicator.

A trader may choose between horizontal support, resistance indicator, or have it plotted manually. These often pivot points in the market and traders should be aware of them. As beginners tend to grow, they realize one of the most crucial skills in Forex Trading to be the means of finding support and resistance levels. It is a fact because understanding the basics of support and resistance improves any given trading method a trader adopts. Consequently, recognizing key levels is crucial to the success of any trader.

Moving Average As Support

A moving average supports the price on various occasions. It helps in the reopening a trend after an amendment in a directional direction. Therefore, the favorable entry points in a trend move are when prices are at the support zone around the moving averages.

Moving Average as Resistance

An efficient way of using moving averages is in support levels. We find that in a downward, moving averages repel pullback, therefore, acting as the supply level region. They push the price down, and as a result, the bearish sentiment remains afloat.

The Psychology of Support and Resistance

In a target financial institute, there are typically three types of people willing to participate, at any given price level irrespective of the rise and fall of demand or supply.

Traders who are long, and can wait for the price to rise to a certain level before they can make the transaction.

Short traders are expecting a price fall within a short while. And lastly, undecisive traders who either wait till the price rises or to make a transaction instantly.

The long traders- trader s who expect the increase of the price, are delighted, and the thought of adding to their positions comes to life if the price falls back down to the equivalent support level. The short traders who are expecting the fall of the cost beginning to question their positions and may get to the point of buying in other to cover, i.e., exit the place to get out at, or near, breakeven if the price reaches the support level again. Those who didn't enter the market this price level, maybe eager and ready to bounce, provided that the price falls back down to the support level. Consequently, many traders may be on the lookout to buy at this level. When this happens, the area of support gathers more stability, and if all the traders buy at this level, there is a possibility the price will rebound from the support once more.

However, the cost can fall right within the support level. As the price continues to drop, traders will quickly realize that the support level can no longer hold. The long traders are likely to wait for the price to climb back up to the previous support level, which will now serve as resistance, to exit their trades in the hopes of limiting their losses, which makes them run into loss expect the price rises at a minimum time. The short traders are now excited and may think of adding to their position because the market is favoring them at that stage if the price revisits the price level. Lastly, the last set of traders who did not enter the market yet may go short if the appraisal comes back to the previous support level as they wait for the price to plummet farther. Once more, a large number of traders may be ready to make a move at this level because of the rate as of fall and demand, which will now be higher than supply, but now instead of buying, they will be selling. We see this same behavior in reverse with traders' attitudes towards resistance levels.

Shifting Zones

As for successful Forex traders, there are a few vital technical analysis principles worthy of keeping in mind. A support level is never permanent. Therefore, that which beforehand acted as support will ultimately become resistant in the long run. Conversely, levels that formed resistance will serve as support, once price breaks above the resistance level. We can see these levels on any chart or any time frame. Though traders generally resort to daily charts to figure out areas of support and resistance. However, traders, especially short-term traders, employ smaller time frames for this same purpose. We see support and resistance zones not just at special prices; they can exist along with up or downtrend lines.

Human Emotions and Behavior In Financial Market

Certain factors come into play in matters about financial markets. These include selfishness, anxiety, and herd instincts. It is true because human emotions and behavior are mostly responsible for the price movement in the financial markets. In essence, we see a price chart as a graphical breakdown of emotions, including greed, fear, expectation, and human behavior, such as herd instinct. The price chart illustrates how market participants or traders react to future hopes. As the price goes back to a support level, the long traders will consider increasing their positions to make more money. Meanwhile, the short traders will buy to cover, because they are afraid of losing money in the short run. Herd instinct is also demonstrated near this support and resistance levels, further strengthening them.

The concept of Emotional Price Levels in Financial Market

It is a fact that human emotion influence support and resistance levels. These include round numbers, 52-weeks highs and lows, and historical events such as new market highs. Today, traders and investors are bound to employ these psychological price levels for several reasons. Firstly, prices have remained subject to extensive study in the past, and secondly, traders/investors are aware they are likely to be again.

Market investors often gauge future expectations based on what has happened in the past, i.e., future outcomes can be a result of experience; if a support level worked in the past, the trader might assume that it will provide substantial support again in the future.

Another reason that emotional price levels remain crucial is that they attract a lot of attention and create eagerness of anticipation, which can lead to increased volume as more traders get ready to respond. New market prices that went high, for example, create a buzz of excitement as traders or investors visualize an uptick in price, with no previous resistance to plummet the price. As the bulls take charge, the excitement can lead to a substantial push above the last high, typically with enthusiasm, wanes, and a new resistance level comes into existence.

The Bottom Line

Technical analysts refer to support and resistance zones in the study of past rising and fall of prices and use the fact to predict how the future market will move. Traders draw these zones using precise technical analysis tools. These tools may include horizontal lines or up/down trend lines, or by applying more advanced indicators, such as Fibonacci retracements. Market psychology remains a crucial part of the price movement of a particular instrument as traders and investors are fond of keeping the past in mind, react to changing conditions, and anticipate future market movement.

Pivot Point

Intraday traders find the Pivot Point a very vital indicator. Traders in the financial market identify pivot points is the most profound intraday support and resistance indicator in modern trading. The pivot point indicates the supports and resistance for the day. It does this by considering the trend of the previous day. Technical analysts employ support and resistance levels to indicate price points on a chart where the probabilities favor a break or reversal of a prevailing trend.

Camarilla Indicator

The Camarilla indicator is also known as camarilla pivot points, which draw precise support, resistance, target, and breakout levels for intra-day trading. Taking the previous price, let say yesterday's price High, Low, Open, and Close points; Camarilla indicator calculates 11 levels. 5 "L" low levels, 5 "H" high levels, and a middle Pivot point.

In general, most often traded camarilla levels are L3, L4, and H3, H4. Also, the current Camarilla indicator has built-in regular Pivot points and Fibonacci levels. Traders can switch on or off these two in the indicator settings menu. Timeframes used for trading with Camarilla equation vary, which are 15 min, 10min, and 1 min depending on the level.

How to trade with Camarilla Indicator

Look for markets approaching L3 or H3 level; these are the levels of entry: long at L3 long or short at H3. At L3 support or H3 resistance levels market is expected to either reverse or permanently correct. Therefore, indicators such as Forex Freedom Bar or simple moving averages could help to determine the trend or line direction. Even better, the candlestick trading strategy could be used or implemented.

Support and Resistance Levels for Stocks

Experts define the technical analysis of the stock market as is the knowledge of stock prices for hints of where the price will go either high or low in the nearest future. Support and resistance levels are fundamental building blocks of the technical analysis of stocks. Even if you are a trader or an investor who buys shares on the fundamentals, an understanding of support and resistance can assist with your stock purchase timing, which can make it a bit accurate.

Using Support Price Charts

Traders find stock price support and resistance levels using price charts of the stock's historical figures. They need access to some form of stock charting software to visualize and plot these share price levels. Various channels online and elsewhere provide free charting services, or your online brokerage account may help in charting for technical analysis.

Stock Support Levels

The stock support level is a value that there is a downturn in the share price. It implies reduction several times but not continued to lower costs. On the stock share price chart, a horizontal trend indicates the support level with the share value coming down to the direction on many occasions before coming back to higher price levels. An impeccably drawn support level highlights some touches, with the price moving higher after every advance made towards the cost at support.

Establishing Support and Resistance Levels

The stock share price in a trading range moves in three ways- an uptrend, a downtrend, or moves sideways. The support and resistance levels are the barriers to a trading range-bound stock price. It remains that the higher the frequency share price approaches or tends a support or resistance level without breaking through, the higher the effectiveness of the resistant level to traders. It is crucial to practice as it helps the trader choose the levels out with a higher level of certainty.

Trading Support and Resistance

When a stock share price tends a support or resistance level, two things are likely to occur. First, if the level holds, the share price will reverse, and the investor can attempt to make a profit as the share value moves toward the opposite scale. And secondly, if the share price breaks through a level, it is the possible indicator of a new up or downtrend. At that point, the trader views the old support or resistance level as a further resistance or support level.

If you like this strategy, you might also be interested in this Forex Day Trading Strategies: The Ultimate Guide

Final Words

Successful traders around the globe are on the continuous lookout for the best resistance and support tools, ideas, and indicators. Why do they do this? The answer is simple. Traders must improve their trading in the most reliable way. The available tools are in their numbers. Given that one trader differs from the other, it is therefore imperative for each trader to research and test multiple support and resistance tools and indicators to figure out what works best for their style.

Support and resistance levels are essential for finding targets, measuring breakouts, trading breakouts, recognizing reversal bounce spots, trading bounces, and bypassing vulnerable setups just before support and resistance.

author

NSBroker Analytics Team

Expert Traders From NSBroker specialize in forex trading and have been successfully helping people profit from the markets for the past 9 years. Our traders consistently blog about the state in which the markets are at. Learn how to profit via forex trading with NsBroker.