Introduction
Perhaps the most crucial idea in all of technical analysis is support and resistance. These ideas form the foundation for numerous other facets of technical analysis. Therefore, we must first fully grasp this idea before moving on.
The key price areas on any security's chart that are anticipated to draw the greatest volume of buying and selling are called resistance and support.
All it takes to profit in any financial market (stocks, commodities, currencies, cryptocurrencies, etc.) is the well-known adage, "Buy Low and Sell High." This is the exact point at which resistance and support become relevant. This requires one of two strategies: either buy at support and sell at resistance later, or sell at resistance and buy back at support.
What is support ?
As the name implies, it is the point at which a security's price stops decreasing because there is enough demand to prevent it from falling any lower.
As previously said, a security's price drops when supply exceeds demand. As the price approaches the support level, more and more buyers get eager to purchase the security; as a result, supply exceeds demand and the price stops dropping further and begins to rise.
A security's support will always emerge or form below its present market price.
Support may take the shape of a zone or a single price level. This will become evident as you examine the instances that follow.
The reference point where the majority of repetitive buying (demand) has occurred in the past and is most likely to occur again in the future is provided by the support level or zone. From the perspective of a market player, it is a crucial technical level.
How to plot Support level or Zone?
The support level or zone should be plotted appropriately by following these steps.
1. Examine the price data from the past.
2. Determine the lowest points.
3. Label every low-touch area.
4. Link every touchpoint.
1. Examine the price data from the past.
The first step is to examine historical price data for the security whose support level you are looking for.
For this method, an OHLC bar chart or a candlestick chart can be used. Avoid using line charts as they do not account for the opening, closing, and high and low prices of a trading day.
Candlestick charts are my favorite type of chart since they are the most straightforward and offer all the information I need.
2. Determine the lowest points.
Seek out severe lows, or price points or zones where the price of an asset most frequently turns higher.
The term "price point" in this context refers to a specific position from which there has been a significant price reversal, whereas the term "price zone" refers to a zone where prices become stuck following a temporary decline.
3. Label every low-touch area.
Once you have determined the extreme lows for each support level, you must circle or mark these levels to make them easier to see and comprehend. Look for three or more of these points, if possible.
4. Link every touchpoint.
Connecting all of the touch locations comes next when you have finished marking them all.
Examples of Support
These touch points will now be connected through one or more horizontal lines or through one or more horizontal rectangular zones, depending on the price action and time period of the data. This will result in either a single support level, multiple support levels, a single support zone, or multiple support levels, as shown in the examples below.
Example 1: Single Support Level
Example 2: Multiple Support Levels
Example 3: Support Zone
Example 4: Multiple Support Zones
What is Resistance ?
As the name implies, it is the point at which a security's price stops rising because there is adequate supply to prevent further price increases.
As previously said, a security's price rises when demand exceeds supply. As the price approaches the resistance level, more and more sellers get eager to offload the security, resulting in a situation where supply exceeds demand and prices begin to decline instead of increasing higher.
There will always be resistance above a security's present market price.
Resistance may take the shape of a zone or a single price level. This will become evident as you examine the instances that follow.
The resistance level or zone eventually provides us with the point of reference where the majority of supply (selling) has occurred in the past and is most likely to occur again in the future. From the perspective of a market player, it is a crucial technical level.
How to plot Resistance level or Zone?
The resistance level or zones should be plotted accurately by following these instructions.
1. Examine the past price information
2. Recognize excessive peaks
3. Highlight every high-touch area.
4. Establish a connection between every contact point
1. Examine the past price information
Looking at a security's historical price data is the first step towards determining its resistance level.
2. Recognize excessive peaks
Seek out extreme highs, or price points or regions where a security's price most frequently falls downward.
In this case, the price zone denotes the area where a price becomes trapped following a brief up move, whereas the price point refers to a specific position from where there has been a significant reversal in the price.
3. Highlight every high-touch area.
Once you have determined the resistance level's extreme highs, you must circle or mark these levels to make them easier to see and comprehend.
Once more, you must make an effort to locate three or more of these points.
4. Establish a connection between every contact point
Connecting all of the touch locations comes next when you have finished marking them all.
Examples of Resistance
These touch points will now be connected through one or more horizontal lines or through one or more horizontal rectangular zones, depending on the price action and time period of the data. This will result in either a single resistance level, multiple resistance levels, a single resistance zone, or multiple resistance levels.
Example 1: Single Resistance Level
Example 2: Multiple Resistance Levels
Example 3: Resistance Zone
Example 4: Multiple Resistance Zones
The Bottom Line
The places of maximal possibility for a pause or reversal of the existing trend are known as support and resistance. They make sense in terms of supply and demand.
The rule of supply and demand determines the price of any financial asset or security. Price increases for securities occur when buyer demand exceeds seller supply, and price declines for securities when seller supply exceeds buyer demand.
Support and resistance are merely benchmarks for the purchase and sale of stocks. To obtain greater confirmation in trading, they should be utilized in conjunction with other tools like candlestick patterns and chart patterns.