What is support and resistance?
A ball falls to the ground and rebounds. It will fall after reaching the ceiling if you throw it up. Prices are positioned between support and resistance, which are similar to a floor and a ceiling. Price changes must be understood in the context of support and resistance. Depending on how strong they are, you can determine if the trend is likely to continue or turn around.
Support is a price level when purchasing power is sufficient to break or reverse a downward trend. As a diver strikes the bottom and pushes away from it, a downtrend that has support bounces when it does so. On a chart, support is shown as a horizontal line joining two or more bottoms.
A price level known as resistance is one where selling pressure is high enough to halt or reverse an upward trend. A man climbing a tree who strikes his head on a branch slows and may even fall when an uptrend encounters resistance. On a chart, resistance is shown as a horizontal line joining two or more tops. Instead of drawing support and resistance lines across extreme prices, it is preferable to do so around the margins of the congested areas where the majority of the bars halted. While the extreme points merely represent panic among the weakest traders, those congested zones show where large numbers of traders have altered their thoughts.
Trends can stall or reverse depending on the strength of minor or large support or resistance. Trading results in a self-fulfilling prophesy since traders purchase at support levels and sell at resistance levels.
How to determine support and resistance on a chart?
In areas of concentration, draw horizontal lines along the upper and bottom boundaries. The final result indicates the strength with which buyers prevail over sellers. Where sellers outnumber buyers, resistance is shown by the upper line. Areas of support and resistance frequently alter places. Observe how prices encountered resistance following a clear upward breakthrough, but as they rose over it, the area became an area of support. Every time prices get close to these obstacles and then swerve away, their strength grows. Watch out for phony breaks through both support and resistance. Professionals typically fade (trade against) breakouts while novices tend to follow them. At the level where its prior rally ran into opposition, AMD is reversing course and rallying from support at the right edge of the chart.
Why can we find patterns in the different price levels?
We make purchases and sales at particular levels as a result of our memories of previous market changes. Crowd buying and selling generates support and opposition. People have memories, which causes support and opposition. Traders are more likely to buy when prices retrace that level if they recall that prices recently stopped falling and went up from that level. When prices re-approach the level where an uptrend recently reversed after reaching a given peak, traders often sell and go short.
Because a large number of traders experience sorrow and regret, support and resistance exist. Losing traders experience excruciating suffering. Losers are eager to exit the market as soon as a new opportunity arises. Traders who missed a chance to buy or sell short regret it and wait for another opportunity to present itself in the market. In trading ranges, when swings are modest and losers are not overly affected, feelings of suffering and regret are minimal. When such ranges are breached, significantly more severe regret and anguish result.
Traders become accustomed to purchasing at the lower side of the range and selling or perhaps even shorting near the high edge when the market is flat for a while. Bears who traded short suffer greatly when an uptrend starts. Bulls regret greatly not purchasing more at the same time. If the market descends to the breaking point and gives them another chance to place short positions or go long, they are both determined to purchase. Bulls and bears alike are eager to buy as a result of their anguish and remorse, providing support for upward reactions.
Bulls who bought are hurt when prices fall out of a trading range; they feel entrapped and hope for a rally to break even. The opposite is true for bears, who wait for a rally as a new opportunity to sell short because they regret not shorting sooner. Resistance a ceiling over the market during downtrends is created by the suffering of bulls and the regret of bears. The intensity of feelings among large groups of traders determines the magnitude of support and resistance.
Psychological factors in support and resistance
Bulls and bears are more emotionally invested in a congestion zone the longer prices are in it. Similar to a battleground with explosion craters, a congested area affected by multiple trends has defenders who have lots of cover and will likely slow down any invading force. It provides support as prices move toward that area from above. It serves as resistance when prices bounce into it from below.
These roles can be reversed in a congested area, which can act as being either support or resistance. Three things affect how strong certain zones are: their length, height, and amount of activity that has occurred there. These elements can be thought of as the breadth, depth, and length of a congestion zone. A support or resistance area’s strength increases with length, whether measured in time or in the number of blows it withstood. Like fine wine, support and resistance get better with age. A 3 month trading range gives people time to adjust and produces medium support or resistance, while a 3 year range establishes itself as a benchmark of value and offers massive support or resistance. A 3 week trading range simply offers minor support or resistance.