Support and resistance levels are used by traders as a technical analysts to identify certain price points on a chart. An example is when the probabilities favor a rise or reversal of the current trend.
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What are Support and Resistance Levels?
Support is a price level where a downtrend is expected to pause. This is due to a concentration of demand or buying interest. When the price of the assets or the securities drops, the demand for the shares rises. Hence, this forms a support line.
Resistance is a zone which arises when selling interest after the prices have increased. If a resistance or support area or zone has been identified, then the price levels can become entry or exit points. When a price reaches a point of either support or resistance, it will either bounce back, or violate the price level. This trend will continue until it hits the next support or resistance level.
How to Trade Better Using Support and Resistance Levels?
Support and resistance can be used to make better decisions during trading.
How to Use Trendlines
Support and resistances and are represented by both angled and horizontal lines called trendlines. These signify both uptrends and downtrends as well as stability. These trendlines can provide investors with an idea of how the market will move and in which direction.
Using Minor and Major Support and Resistance Levels
These support and resistance levels don’t hold up. If the price is trending lower, then it will make low and then bounce, and then drop again. This is called a minor support area. These areas of minor support and resistance provide some analytical insight and potential opportunities for trading.
However major support and resistance areas represent price levels which have caused trend reversals recently. These areas represent a stable support or resistance level. This means that the trends of the market will struggle to break through these levels.
The basic method to use for both resistance and support trading is to buy near support in uptrends. You can also buy in the parts of ranges or chart patterns where prices are moving up. You can sell or short near resistance in downtrends. This helps analysts isolate long term trends.
When asset prices and commodity values break through slightly, it’s called a false breakout. If an analysis shows there is support at $10, then it’s quite possible that the price could drop through to $9.97 or $9.95.
These are excellent trading opportunities since it allows you to pick up shares while they are undervalued. Or you can short if the shares are overvalued.
Adapting Trading Decisions
Support and resistance levels are dynamic. Hence, trading decisions that are based on them should be dynamic as well. A potential trend change or a confirmed breakthrough should be factored into trading decisions. When the new normal shifts, then the trading strategy should also shift.