8 Best Facts To Remember About Support and Resistance During Trading
Support & Resistance is one of the most important concepts in technical analysis. These two terms are used to refer the barrier to the price against movement to a certain direction that is found during chart analysis.
We shall discuss below mentioned points in this article:-
What is support and resistance?
Is support & resistance an area or line?
How to draw a support and resistance line?
When the support & resistance become weaker & stronger?
What is dynamic support & resistance?
How to get better risk reward ration using support & resistance?
How to set stop loss using S&R level?
How to predict if a support or resistance level will be honored or broken?
What is support and resistance?
Support: Support is defined as the area of price in the chart where price get barrier to fall further. It is the area where traders expect most of the demand / buying pressure to emerge. Support is placed always below the current price level.
Resistance: Similarly resistance is defined as the price area in the price chart where price get barrier to rise further. It is the area where traders expect most of the supply / selling pressure to emerge. Resistance is placed always above the current price level.
When price break above/below the resistance and support comfortably with volume then the resistance becomes support and support converts to resistance for the current price.
📷Is support & resistance an area or line?
In most of the article and books S&R has been mentioned as a line.
But actually this is an area in price chart. As price approaches to S&R area few traders take action before price enter into the area in the fear of missing out and few wait longer to get better price. Due to that price often reverse early and sometimes trade beyond S&R level. As a result support and resistance generally act as an area in the price chart. In the previous picture support and resistance level has been shown as an area.
How to draw a support and resistance line?
To draw support and resistance level we have to follow below mentioned rules:
i.First we have to zoom out the chart so that the chart becomes concentrated.
ii.Then we have to find out price action areas with below characteristics.
a.Where price movement is sticky or price hesitate to move beyond certain levels.
b.Where price take sharp reversals.
i.Then we have to draw lines connecting the zones in the same level as marked above. If time space between the zones is more then more reliable the S&R level is because it is time tested.
Next images describe how to draw support and resistance levels-
📷📷When the support & resistance become weaker & stronger?
There is a common myth that more a support or resistance is tested stronger it becomes.
But this is not true all of the time.
When the support or resistance area is tested repeatedly with in a short period of time then it becomes weaker and there is a high chance that it will be broken.
Conversely if a support or resistance area is tested after a substantial amount of time and it is honored then it becomes stronger because it becomes time tested and it support the notion ‘history repeats itself’ of technical analysis.
Also Learn the other topics of Demand Supply trading strategy below:
Technical Analysis Basics
Bullish Candlestick patterns
Bearish candlestick patterns
Indecision and continuation candlestick patterns
How to use Volume in trading
Trade management and stop loss
What is dynamic support and resistance?
It is not necessary that support and resistance will always be in static horizontal form. It may be more complex and dynamic. Here are few cases….Read More
