What are Support and Resistance Levels
SUPPORT AND RESISTANCE LEVELS
Support and resistance levels are two of the main points in determining the psychology of the market and are indicatives of the demand and supply meet. These are very helpful for traders in analyzing and exploring the patterns in trading markets and thus act according to these indicators. These points give traders a better understanding of the market’s supply and demand.
Support is that level in the pattern where the demand is great so the prices are seemed to be finding support when these start to fall. In simple words, when the prices of the securities drop and lean towards finding support, the demand increases, and the buyers are approaching to buy more and sell less. In other words, when the support level is approached, there is more buying and less selling as the buyer’s interest increases and sellers’ decreases. Where there is a support level there is a downgrade in pricing and hence the demand rises. When the prices find the support level they bounce back and then approach the resistance level.
The resistance level is the exact opposite of the support level, it is termed as an increase in the pricing and thus there is less demand and more selling. The seller’s interest increases due to an increase in prices and the demand decreases. It can be understood in such a way that the prices are halted or find a resistance when they start to increase after the support level has been achieved. Resistance showcases the uptrend in prices and an increase in selling. In simple terms, traders fix the profits when the prices rise and make the trend line go in the opposite direction which means that the trend doesn’t progress further. These trend levels help traders in deciding whether they should buy or sell in the market.
Support and resistance levels can be identified easily through trend lines and also through pivot point calculations. To have a better understanding and identification of support and trend levels the traders must know trend lines so that it becomes easier for them to identify these levels. Generally, when there is an uptrend in the market the resistance levels are formed because the movement of price decreases and it begins pacing back to the trend-line and similarly, whenever there is a downtrend in the market traders look for a reducing sequence and thus connect these declining peaks with a trend-line.
In technical analysis, when certain support or resistance level is broken its role is reversed. In other words, the roles of support and resistance levels are reversed when either of them is broken. If the prices start to fall further below the support level then it becomes the resistance level and similarly, if the prices start to rise above the resistance level it becomes support level. It occurs because when the prices breach a certain support and resistance level it is usually considered that the trend in demand and supply has been shifted and thus the role of these two levels is shifted.
IMPORTANCE OF SUPPORT AND RESISTANCE
Support and resistance levels are very important for traders to have a better understanding of the market trends because they can be beneficial in understanding the prevailing market situation. These can also help traders in analyzing the trends in the market and can also be indicative and predictive of trend reversals. Support and resistance levels also help in understanding and simplifying the end-to-end analysis where multiple time frames are being used. Traders can also design a new trading policy using support and resistance levels. These levels also make traders recognize the true and false signals. Support and resistance levels show the downtrend and uptrend in pricing hence this rise and fall in the prices help traders identify the emotions and sentiments of the market contributors.