Support and Resistance

Support and Resistance are vital elements of technical analysis. The main idea behind Support and Resistance is that the price of a financial instrument is likely to stop and/or change its price direction at certain key levels that have been predetermined.

Support : is a price level where a financial instrument that is going down is likely to find support there and hence being prevented from dropping down.

Once the financial instrument which is dropping is faced with a support the following two scenarios may happen.

 

1)  The price may bounce after visiting the support level and start going up.

2)    The price movement exceeds the support level and continues to drop until being faced with a new support level.

 

Resistance : is a price level where a financial instrument that is going up is likely to find resistance there and hence being prevented from moving higher.

Once the financial instrument which is moving up is faced with a resistance the following two scenarios may happen.  

1)    The price may bounce after visiting the support level and start going down.

2)    The price movement exceeds the resistance level and continues to drop until being faced with a new resistance level.

HOW TO USE SUPPORT AND RESISTANCE

1)    As an entry point

1a) Bounce : Once you have identified what the Trend of the market  is you may want to wait till the market makes a Bounce on a key level and then enter the trade. This is to ensure that you enter the trade at the best possible price.

If the Trend is Up, wait till the market makes a bounce on a Support Level and then Buy  
       
    

 

If the Trend is Down, wait till the market makes a bounce on a Resistance Level and then Sell  

 

1b) Breakout: Whenever a Support or Resistance Level is broken you may want to follow the breakout direction direction as this could be followed by an increased price movement heavy volume and volatility.
 

2)    As an exit point after you have entered a trade

2a) Take Profit : Simply identify the key level where there is a potential Support or Resistance to your trade (Support if have a Sell position, Resistance if you have a Buy position) and set a Take Profit there. The intuition behind this is to protect your trade from facing a Bounce on a key level and hence start heading the opposite direction and loosing.

2b) Stop Loss: Simply identify the key level where there is a potential Support or Resistance to your trade (Support if have a Buy position, Resistance if you have a Sell position) and set a Stop Loss there. The intuition behind this is to protect your trade from facing a Breakout on a key level opposite the direction of your trade which would imply substantial losses if it would occur.

 
The following Technical Indicators can be used to determine Support and Resistance Levels. Click on them to see their use
Horizontal Price Levels
Fibonacci Retracement Levels
Moving Averages
Trend Lines
Round Numbers Levels