Welcome trader to two of the most important concepts in technical analysis.
These are price levels where supply and demand are in equilibrium, which causes the price to tend to bounce in these areas.
What is a support in trading?
A price level below the current price at which buyers usually intervene to prevent the price from falling further. In other words, it is a price level at which demand is greater than supply.
What is resistance?
A price level above the current price at which sellers usually participate to prevent the price from rising further. We are talking about a price level where the supply is greater than the demand.
How to identify support and resistance in trading
There are several ways to identify support and resistance.
One of the most common is to use the previous lows and highs of the price. In a bull market, the previous lows usually act as supports, while the previous highs are considered as resistances. In a bear market, the previous highs usually act as supports, while the previous lows act as resistances.
Another way to identify supports and resistances is by using trend lines.
An uptrend line is drawn by connecting two consecutive lows, while a downtrend line is drawn by connecting two consecutive highs. When the price touches a trend line, it usually bounces off that area.
In addition to previous lows and highs and trend lines, other factors can also be used to identify support and resistance, such as:
Psychological price levels: prices that are multiples of 5, 10, 25, 50, etc., are usually psychologically important price levels, which can cause the price to react in those areas.
Fundamental price levels: Price levels that coincide with fundamental events, such as the release of economic news or corporate results that have an important influence on one or more markets.
Importance of support and resistance
Support and resistance are a very important tool for us traders. We can use them to identify entry and exit opportunities in the market, as well as to manage risk. For example, you could buy an asset when the price reaches a relevant support. If the price bounces off the support, you are able to wait for the price to rise further before selling.
On the other hand, you could sell an asset when the price reaches a relevant resistance. If the price rejects at resistance, you are in a position to wait for the price to fall further before buying.
Support and resistance are not perfect. Price may break them, but it will most likely bounce off them several times before doing so. As we like to say, the market is alive and there are no perfect formulas.
Learning to identify these elements as a pro can help us significantly improve our profitability. If you are interested in becoming a pro-trader, check out our professional course here.
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For this article, prompts have been used to request information
interpreted and provided by AI (Google Bard). Written and edited
by Kevin David Terán and verified by Pedro Arizaleta and Erwin Sánchez