Understanding Support and Resistance

support and resistance

As a beginner trader, one of the basic concepts you need to understand is the concept of Support and Resistance. I this article, I will outline the basic things you need to know about support and resistance.

Support indicates a point on a price where buying pressure is higher than selling pressure. The support acts as a floor or base for price to bounce upward.

support and resistance

Resistance on the other hand indicates a point on a price where selling pressure is higher than buying pressure. The resistance acts as a ceiling or roof for price to push downward.

support and resistance

Price moves in series of Peaks and Troughs and this determines the trend of the market. This peaks and trough brings about the concept of support and resistance. The peaks are the resistances and the troughs are the supports. So, the resistance is the opposite of support.

Support and Resistance areas are demand and supply zones; when the demand is greater than the supply at support levels, prices move in upward direction and when supply is greater than demand at resistance levels, prices moves in downward direction or retraces.

NOTE: IT IS PRACTICALLY ACCEPTABLE WHEN DRAWING SUPPORT AND RESISTANCE LINES IF THE LINES CROSSES A CANDLE OR WICK OR DOESN’T TOUCH THE WICK OR ONLY TOUCH THE WICK.

BREAKDOWN AND BREAKOUT

When a support zone or level is testes several times, it becomes weak leading to an increase of supply at that price point or support zone. This will cause prices to lower down or fall. This is referred to as BREAKDOWN.

support and resistance

BREAKOUT: when a resistance level is tested several times, it becomes weak leading to an increase in demand at price point or resistance zone. This will cause price to breakout causing an increase in upward price movement.

support and resistance

NB: Breakdown at support level is dependent on low VOLUME and Breakout at resistance level is dependent on high VOLUME.

 

WATCH VIDEO FOR BETTER UNDERSTANDING

https://youtu.be/IdTrLlKCetA

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What does support and resistance tell?

Support and Resistance areas are demand and supply zones; when the demand is greater than the supply at support levels, prices move in upward direction and when supply is greater than demand at resistance levels, prices moves in downward direction or retraces. These are lowest and highest points prices reach before changing direction.

How do you determine strong support and resistance?

You determine strong support if the support is not tested several times and you determine strong resistance if the resistance is not tested several times. The more the support or resistance is tested, the weaker it becomes and a possible breakdown or breakout may happen.

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