Support and Resistance (S&R) are foundational concepts in technical analysis used to identify key levels where the price of an asset is likely to encounter obstacles in its movement.
Support is a price level where the price action finds it difficult to break below, as there is typically a concentration of buying interest at or around that level. When the price approaches a support level, buyers are more inclined to enter the market, leading to increased demand and a potential reversal of the downtrend or a temporary halt in the downward movement.
Support levels can be identified by looking at historical price data and identifying areas where the price has bounced back from after declining. They can also be associated with psychological levels, moving averages, trendlines, or chart patterns.
Resistance levels are exactly opposite of support levels.
Recognition of strong S&R levels is key to make informed trading decisions. You buy near support levels with the expectation of a bounce, or sell near resistance levels with the anticipation of a reversal. A breakout above resistance is potentially buliish and a breakdown below support is potentially bearish price action. A strong support level changes to resistance on breaking and vice versa.
When defined setups appear on the chart, their proximity to S&R levels is integral to filtering the trade. For example, a bullish setup appearing at or just below a strong resistance level can be filtered out as the probability of price advance is low. On the other hand, a bullish setup occurring
at a strong support level or
when the price has already broken above nearby resistance level (which then becomes support)
has a much higher probability of advancing.
S&R can be classified into four types as below, each having its own characteristics.
Horizontal
Pivot
Congestion
Gap
Each of these different types has been detailed along with chart examples in subsequent posts.
There are many other types of S&R that are followed by the trading community such as those denoted by trendlines or moving averages, however, this tutorial is only about content relevant to our Trading System. Cutting through the clutter!
Please click on "Next Post" to move to Horizontal S&R.
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