Support and resistance levels are two basic concepts in technical analysis. These are essential tools that involve analyzing historical price data and identifying patterns and trends to help make predictions of future price movement and make wise trading decisions.
Support indicates the price level of a security or asset that is likely to find buying interest, reducing the price from falling further. It also represents the level at which demand for an asset is considered stable enough to combat selling pressure, leading to a recovery in its price. Support levels are usually seen as horizontal lines or areas on a price chart, showing where values have previously reversed from a downtrend to an uptrend.
Meanwhile, resistance shows that the price level is likely to face selling pressure that may limit the price rise. Additionally, it marks the point at which the supply of an asset exceeds demand, which can lead to price fluctuations. In contrast to support, horizontal resistance lines show a trend change from bullish to bearish.
Before using support and resistance, one must understand typical asset movements first. It would help explain the support and resistance of the framework better.
When using support and resistance, the basic trading method is to buy near support in uptrends or where prices are moving up and sell near resistance in downtrends or where prices are moving down.
Support and resistance levels help indicate the direction of the trend. Support levels usually show potential entry points for buying in an uptrend, while resistance mainly indicates potential exit points for selling in a downtrend.
In downtrends, resistance may provide opportunities to enter short positions. At the same time, support levels may be potential targets for stock selling or reversal signals.
Although buying and selling based on these levels can pay off, there is no guarantee that support or resistance will hold.
Remember that support and resistance are dynamic, so traders' trading decisions must be aggressive as well.
