What is Support?

Imagine you’re at a party and you drop your phone. (Oh no!) Miraculously, it lands on a thick, plush carpet that saves it from shattering. That carpet is your phone’s support. In the market, support is a price level where a downtrend can pause due to a concentration of demand. As prices drop and reach this level, buyers swoop in, causing the price to bounce back up.

What is Resistance?

Now, picture you're trying to get through a crowded concert. The crowd is thick, and it's almost impossible to move forward. That crowd is your resistance. In trading, resistance is a price level where an uptrend can pause due to a concentration of selling. As prices rise and reach this level, sellers step in, causing the price to drop back down.

How Support and Resistance are Drawn

Drawing support and resistance levels is a bit like being an artist with a very particular canvas. Here’s how you do it:

• Support: Draw a horizontal line at the bottoms on the chart where the price has repeatedly hit and bounced back up.

• Resistance: Draw a horizontal line at the peaks on the chart where the price has repeatedly hit and fallen back down.

Note: In a candlestick chart, support and resistance levels are drawn on the shadows of the candles. This means you draw support at the lowest price of the candle's shadow and resistance at the highest price of the candle's shadow. Think of it as marking the extremes of the market.

Historical Levels and Psychological Levels

Support and resistance levels can be historical or psychological. Historical levels are price points that have been tested multiple times in the past. Psychological levels are whole numbers that traders naturally head towards, like 50, 100, or 1000. It’s like how people often set personal goals at round numbers—“I’ll start exercising when I hit 70kg.”

How Support Gets Stronger

A strong support level is like a fortress, tough to breach. Here’s what makes it stronger:

• The More Times It Is Touched: Every time the price bounces off the support level, it gets more solid. It's like adding another brick to the wall each time.

• The Longer It Sticks Around: The longer the price stays on the support level , the sturdier it becomes. Imagine an ancient castle wall standing the test of time.

• The Sharper the Bounce: A sharp upward move after touching support signals a strong buying interest. It's like bouncing on a trampoline—higher jumps mean stronger support.

• The Higher the Volume: A rise in price with a lot of trading volume shows strong conviction among traders, making the support level more reliable.

• Importance of Recent Support: The more recent a support level is, the more significant it becomes. Traders and investors tend to place more weight on recent support levels as they represent the most up-to-date confidence in the price floor, making them crucial for decision-making.

• Distance to Support : The distance the price travels before hitting a support level can provide valuable insights into the market's strength. A long journey to support suggests significant downward momentum and strength in the sellers power in the market.

How Resistance Gets Stronger

Resistance levels can be equally robust, like a mighty dam holding back water. Here’s how they get stronger:

• The More Times It Is Touched: Each time the price hits the resistance and falls back, the stronger it becomes.

• The Longer It Holds: A resistance level that price holds for a long time at this level gaining more strength. Think of it as an old oak tree that stands firm against the wind.

• The Sharper the Drop: A sharp decline in price after hitting resistance indicates strong selling pressure. It's like a ball hitting the ceiling and dropping quickly.

• The Higher the Volume: A fall in price with high trading volume shows strong selling conviction, reinforcing the resistance level.

• Importance of Recent Resistance : the more recent a resistance level is, the more important it becomes. As these levels are fresh in traders' minds, they act as key points where sellers might step in, making them critical for predicting potential price ceilings.

• Distance to Resistance: the distance the price travels before hitting a resistance level is telling. A long trek to resistance suggests strong upward momentum and robust buying interest.

Combining Points of Support and Resistance

The market often combines multiple points of support or resistance to form more robust levels. For instance, if the price touches a support level multiple times and sharply bounces away each time, it reinforces the level's significance. The more times a support or resistance level is tested and the more decisively the price moves away from it, the stronger and more reliable these levels become for traders.

Role Reversal: When Support Becomes Resistance and Vice Versa

Here's a plot twist for you—support and resistance can switch roles! When a support level is broken, it can turn into resistance. Conversely, if a resistance level is broken, it can become support. Think of it like this: you’re in a game of limbo. The bar you couldn't get under before (resistance) becomes the bar you stand on after you clear it (support). This role reversal can be a powerful signal in trading, indicating a shift in market sentiment.

Breaking of Support and Resistance

When it comes to breaking support and resistance, the time frame of your chart plays a crucial role. On weekly charts, breaking a peak or bottom is usually enough to confirm a breakout or breakdown. This is like saying, "Aha! We've crossed an important threshold!" However, on daily charts or shorter time frames, you need to see a higher high or lower low to confirm that the break is genuine. It's like needing extra proof to be sure the market is really making a move and not just testing the Support or Resistance.

Support and Resistance Zones

Support and resistance aren't always precise lines; they can be broader zones too. Imagine an uptrend where the market takes a breather, forming a sideways pattern. If the price breaks through the resistance zone, it creates a buy signal, signaling the continuation of the uptrend. But if it fails and breaks below the support zone, that's your sell signal, hinting at a trend reversal.

In a downtrend, the market might pause for a bit, forming a sideways pattern. If the price breaks below the support zone, it signals the continuation of the downtrend with a sell signal. Conversely, if it breaks above the resistance zone, it creates a buy signal, indicating a possible trend reversal. It's like catching your breath during a workout and deciding whether to continue pushing hard or take it easy.

In a sideways market, it's all about drawing support and resistance zones at different levels. This helps you prepare for opportunities as potential buy or sell signals appear, so the market stays stuck in a sideways range and if the market decides to break out of this range, you're ready for any action.

Conclusion

Understanding support and resistance is a crucial part of trend analysis. These levels act as barriers that can stop the price from moving higher or lower. By learning to identify and draw these levels, and understanding what makes them stronger, you can make more informed trading decisions. So, the next time you’re analyzing a chart, remember to look out for those key support and resistance levels—they’re your best friends in the trading world.

Happy trading, and may your support hold firm and your resistance be resilient! 📈🏰🧗‍♂️