Do you know what is support and resistance?
Maybe yes or maybe no.
No matter what you know about support and resistance, today I am going to discuss about support and resistance in such a way that you will thank me later.
So, let’s begin.
Support is a region at which the falling price meets enough buyers to prevent further falls.
And resistance is any region at which the rising price meets enough sellers to halt the rise.
The more times the price meets support and resistance at the same level, the more significant that support and resistance is.
See the below picture closely.
You can see the price of BTCUSD is falling but it meets support at the horizontal line( point 1) that I have drawn and then rises again.
The second time (point 2) it drops, it again meets support at the same price level as enough buyers move in and overwhelm the sellers.
And it happened a third time (point 3), so by now, we can see that this is quite a significant support level.
Do you know why it is happening?
Why the price is repeatedly bouncing off the support line?
It is very simple, each time the price approaches that support level, there are enough buyers who think that the price will not go any lower, so they are buying the stock in sufficient quantities to push the price back up.
Actually, enough people have the same opinion that the price will not go further below. So, they are causing the price to change direction at the same price level.
If this happens a few times, more people will notice and will draw the same conclusion which means even more potential buyers at the support level.
Eventually, though, the buyers who are buying at the support price will become fewer in number as their orders are filled. At some point, there may not be enough buyers left to stop the price from falling through that price level, and the support will be broken.
If this happens, many of the earlier buyers will see the price drop and will decide to sell their holding immediately, before their position moves further into a loss.
This selling will cause the price to drop further, and faster.
Similarly, many of the traders who were already holding the stock will know that this break is likely to cause the price to drop, and so they too will sell their holding, thus adding further to the selling pressure and the price fall.
The traders who were previously buying at the support level before it was broken, are now sitting on a potential loss.
If the price goes back up to what was the support level, they will see this as an opportunity to sell their holding at or close to the price they bought for it.
This selling will cause the price to fall again.
Also, many traders who were already holding stock before the price broke the support level and didn’t sell it immediately will also want to sell if and when the price gets back there, so adding yet more to the selling pressure and making the price even more likely to fall.
All of this selling going on at the previous support level means that the support has now turned into resistance!
Every time the price tries to rise, more selling happens, forcing it back down.
This is actually a very common occurrence.
Exactly the same thing can happen in reverse, with a resistance level turning into support.
Let’s look at what happened next in the previous example. You can see that the price reached the support level, it broke through:
Always remember that the support and resistance lines are not as absolute as in the above examples.
When looking for support and resistance you have to use your judgment in a certain context.
Trends:
Simply trends can be thought of as support and resistance on a slope.
There are two types of trends in the stock market. One is up-trend and another is down-trend.
Uptrend:
An up-trend is formed when the price makes higher highs and higher lows. That means the price is continuously rising.
Here is an example of an up-trend:
In the above image, you can see six clearly defined highs.
Down-trend:
A down-trend is formed when the price makes lower highs and lower lows. That means the price is continuously falling over time.
Here’s an example of a down-trend:
You can draw trend lines on a trend by linking the lows in an up-trend and linking the highs in a down-trend.
You can see I have drawn the trend lines on the previous two examples.
Conclusion:
Support and resistance are one of the most important concepts in trading and investing.
Without knowing support and resistance, you will not do well in both trading and investing.
To be a good trader you should learn the concepts of support and resistance first.
You may bookmark this post on your browser and read it, again and again, to make the concept clear.