In this post, we are going to tell you about the Support and resistance complete guide for beginners and also professionals..
Support and Resistance
1.. What is Support And Resistance
Among all the aspects of technical analysis, perhaps the most important concept is support and resistance. Many other aspects of technical analysis are based on these concepts. Hence before proceeding further, we first need to understand this concept thoroughly.
Support and Resistance are the important price points on
the chart of any security at which the security is expected to
attract the maximum amount of buying or selling. They are the points where there is a maximum probability of a pause or a reversal, of a prevailing trend. The logic behind them is demand and supply.
The price of any financial asset or security is driven due to the law of demand and supply. When the demand (buyers) is more than the supply (sellers) price of a security increases and when the supply (sellers) is more than the demand (buyers) price of a security decreases.
The age old saying of ‘Buy Low and Sell High’ is the only thing that is required to make money in any financial market (stocks, commodities, currencies, cryptocurrencies, etc.) This is precisely where support and resistance come into the picture. For this, one has to either buy at support and later on sell at resistance or sell at resistance and buy back later at support.
Most of the financial market traders use the concept d support and resistance as an important factor while tradi in the market, be it scalping, day trading, swing trading d positional trading.
What is Support?
As the term suggests, it is the level at which the price of a security does not fall further as the demand is sufficient enough to hold the price from falling further.
As explained earlier, when supply is more than demand, the price of a security decreases. Now as price reaches near the support level, more and more buyers get keen to buy the security whereby demand becomes more than supply and hence price stops from falling further and starts rising.
Support will always appear or form below the current market price of a security.
Support either be in form of a single price level or a zone. This point shall be clear when you look at examples ahead in this chapter.
Support level or zone ultimately gives us the reference point where the most repetitive buying (demand) has happened in the past and is likely to happen again in the future. It is an important technical level from market participant’s point of view.
2.. How to Plot support Level or Zone
The following steps are to be followed to correctly plot the support level or zone.
- Look at the historical price data.
- Identify extreme lows. 3. Mark all the low touch points.
- Connect all the touch point.
- Look at the historical price data – The first thing you – need to do is to look at the past price data of a security whose support level you want to find.
You can either use a candlestick chart or an OHLC bar chart for this process. Never use a line chart as it does not take into account open, high and low prices of a trading day.
I always prefer using candlestick charts, as they are the simplest of all forms of chart and provide all the necessary information.
- Identify extreme lows – Try to find extreme lows i.e., price points or zones from where price of a security turns in an upward direction more often.
Here price point refers to a particular point from where there has been a sharp reversal in price whereas the price zone refers to a zone in which a price gets stuck after a brief down move.
- Mark all the low touch points – When you are done identifying the extreme lows for support level then you have to mark or encircle these levels so that they become more visible and easy to understand. Try to find at least 3 or more such points.
- Connect all the touch point – Once you are done marking all the touch points, next step is to connect all those touch points.
3..Support and Resistance indicator
Fibonacci Retracement – How to use it Aage a Support and Resistance
When the price moves in the direction of trend it is called impulses and the move counter-trend or against the main trend is known as pullbacks.
Fibonacci Retracement highlight levels which help us identify potential reversal area thus identifying potential entry point after a pullback.
The retracement can be applied both after an uptrend or a downtrend to identify probable reversal levels in the direction of the prior trend.
When combined with other technical parameters..,
price parameters and some importantd moving averages, the chances of identifying successful trades go up.
The most popular Fibonacci,
Retracements are 38.2%, 50% and 61.8% and 78.6%.
4..Support and Resistance Trading
earlier I explained how to draw simple support and resistance now I shall explain about the role reversal between support and resistance i.e., when support becomes resistance and when Rsistance becomes support. This is known as The principle of Polarity.
This role reversal phenomenon regarding support and resistance occurs when the price of a security is finally able…..
to break out and go beyond an identified Support or resistance Level….
5..Support and Resistance Forex
When moving averages are used as support and resistance, then it becomes dynamic support and resistance. This is because moving average moves along with the price.
Dynamic support occurs in an uptrend while dynamic resistance occurs in a downtrend.
Commonly used or Forex moving averages for short term are 20 and 50 day moving averages while 100 day moving average is commonly used for medium term and 200 day moving average is used for long term.
When any security is in an uptrend, you will notice that the price of that security is always above the moving average. It occasionally moves down to the moving average line, takes support and starts rising again.
Example: Moving Average as Support in Uptrend
6.. Support and Resistance Trading Strategy
A Double Top pattern was formed on the daily chart of Bandhan Bank from October 2020 as shown in the chart below.