Support and resistance have long been vital trading indicators. With their roots in the supply and demand theory, these concepts represent key junctures where the forces of demand and supply meet.
Support and resistance are undoubtedly the most important attributes of technical analysis. Usually, they are used by traders to refer to price levels on charts which might act as barriers which control the movement of the price of a stock or a security. They are the levels from where the movement of this price tends to stop or reverse back. They represent the levels where quite a few traders might be willing to buy or sell the stock on various platforms.
What is support?
Support is defined as the price level at which demand is thought to be strong enough to prevent the stock price from falling any further. Whenever the price reaches the support level, it has difficulty going past that level. The logic dictates that as the price declines and approaches support, buyers become more inclined to buy a sellers become less willing to sell. By the time the price reaches the support level, demand will tend to overcome supply and stop the price from falling below support.
What is resistance?
Resistance is the opposite of support. It is the price level at which supply is strong enough to prevent the stock from increasing any further. The rationale is that as the price approaches resistance, sellers (supply) becomes more inclined to sell and buyers (demand) become less inclined to buy. By the time the price reaches the resistance level, the supply will overcome demand and prevent the price from rising above resistance.
Support and resistance levels are important points in time where the forces of supply and demand meet. These support and resistance levels are seen by technical analysts as crucial when determining market psychology, supply and demand. When these support or resistance levels are broken, the supply and demand forces that created these levels are assumed to have moved, in which case new levels of support and resistance will likely be established.
Some characteristics of support and resistance figures:
- They help stock traders to arrive at entry or exit prices.
- They are a useful aspect of trends as they help traders to make trading decisions and identify when the trend starts to reverse.
- Round numbers are important in support and resistance levels. The increased selling and buying pressure at round numbers lends them psychological importance.
The importance of support and resistance
Support and resistance is a crucial part of trends as it can be used to make trading decisions and identify when a trend is reversing. Besides, these barriers form the basis of many successful trading strategies an almost all market stocks, bonds, forex, options, futures, commodities, and many more.
Moreover, support and resistance are determinant forces in the market. They represent price levels where traders can make financial decisions about profit and loss.
Identifying support and resistance
There are many indicators that have been developed to help identify these two barriers. However, using them effectively takes some practice and experience. Support and resistance can be easily identified with the help of moving averages. Besides, the Fibonacci retracement tool can be used to determine these levels.
Generally, support and resistance play an important role in technical analysis. Furthermore, they are key tools used by research firms, stock advisories, and broking firms which provide stock tips based on their technical analysis.