SUPPORT AND RESISTANCE

“Support and resistance” is one of the most widely used concepts in trading.

Strangely enough, everyone seems to have their own idea of how you should measure support and resistance.

Let’s take a look at the basics first.

Look at the diagram above. As you can see, this zigzag pattern is making its way up (a “bull market”).

When the price moves up and then pulls back, the highest point reached before it pulled back is now resistance.

Resistance levels indicate where there will be a surplus of sellers.

When the price continues up again, the lowest point reached before it started back is now support.

Support levels indicate where there will be a surplus of buyers.

In this way, resistance and support are continually formed as the price moves up and down over time.

The reverse is true during a downtrend.

In the most basic way, this is how support and resistance are normally traded:

Trade the “Bounce”

• Buy when the price falls towards support.
• Sell when the price rises towards resistance.

Trade the “Break”

• Buy when the price breaks up through resistance.
• Sell when the price breaks down through support.

A “bounce” and “break”? Say what? If you’re a little bit confused, no need to worry as we will cover these concepts in more detail later.

Plotting Support and Resistance Levels

One thing to remember is that support and resistance levels are not exact numbers.

Often times you will see a support or resistance level that appears broken, but soon after find out that the market was just testing it.

With candlestick charts, these “tests” of support and resistance are usually represented by the candlestick shadows.

Other interesting tidbits about support and resistance:

• When the price passes through resistance, that resistance could potentially become support.
• The more often price tests a level of resistance or support without breaking it, the stronger the area of resistance or support is.
• When a support or resistance level breaks, the strength of the follow-through move depends on how strongly the broken support or resistance had been holding.