TOPIC ELEVEN
Technical: Support & Resistance
Considered one of the simplest yet surprisingly effective methods of choosing entry levels for a trade are strong support and resistance lines.
Topic One
Topic Five
Topic Nine
Topic Thirteen
Topic Two
Topic Six
Topic Ten
Topic Fourteen
Topic Three
Topic Seven
TECHNICAL: SUPPORT & RESISTANCE
Topic Eleven
Topic Fifteen
Topic Four
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Topic Sixteen
​Support and resistance identifies key levels prices have reached in the past but struggled to go further (in either direction). Traders can use and assess the movement in prices which have already happened to predict what might happen in the future. This ‘history repeats itself’ method is widely used. It is impressive watching a price bounce off historic resistance and support levels.
Identifying support or resistance levels can be done by zooming out as much as possible (e.g. on a daily or weekly chart). Taking this longer term view helps identify if significant patterns are occurring. Charting software allows traders to draw horizontal or diagonal lines to map the trends.
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When a price struggles to break through a level on the up side, it is called a resistance level. This is because the price is resisting the ability to go higher.
On the other hand, a price which keeps bouncing off a level and is struggling to fall below this line is called a support. This level is supporting the price from falling lower.
When both a resistance or support are running parallel with one another, this is considered a range (the market is ranging between two prices).
Other patterns can be identified such that a support and a resistance meet (not parallel) and form a wedge which the price enters. Some traders look for wedges to identifying breakouts when the price gets cornered into a point.
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When a market is trending upwards or downwards, support and resistance lines can still be found. The market can often follow a rising or falling trend where it does not break through the trend line on the way up or down.
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Trending markets to the upside or downside can also run with parallel support and resistance lines where an upwards range can be found. These can help traders pick entry points either taking long (buy) or short (sell) positions.
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When a price breaks through a support and resistance (and closes above/below) to either the upside or downside, the market may consider this as a breakout and continue on that path.
The chart below shows different ways to identify support and resistance levels and channels.
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Support/resistance levels can be strong as well as weak. The chart below shows different levels.
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When a support becomes a resistance (and vice-versa)
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Many times a strong support or resistance level that was broken has become the new opposite. The charts below show how a once strong level was broken and became the new opposite.
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200-day moving averages
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Many traders use 200-day moving averages on the chart. Due to its incredibly long period and therefore long and smooth nature, the market can respect this moving average and also treat it as a support or resistance.
The charts below show how the 200-day moving average acts as a support and resistance level for the price to bounce off.
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