Support & Resistance

Sub Topic : Technical Analysis

Support and resistance is the most widely used concepts in trading. It represent key junctures where the forces of supply and demand meet. In the financial markets, prices are driven by excessive supply (down) and demand (up). Strangely enough, Everyone have their own idea on how you should measure support and resistance.

Supply is synonymous with bearish, bears and selling.
Demand is synonymous with bullish, bulls and buying.

As demand increases, prices UP
And as supply increases, prices decline.
When supply and demand are equal, prices move sideways

What Is Support ?

Support is the price level at which demand is thought to be strong enough to prevent the price from declining further.

What Is Resistance?

Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further.

See image below:

When the market moves up and then pulls back, the highest point/price reached before it pulled back is now resistance. As the market continues up again, the lowest point reached before it started back is now support. In this way resistance and support are continually formed as the market oscillates over time.

By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support.
Support does not always hold and a break below support signals that the bears have won out over the bulls. Once support is broken, another support level will have to be established at a lower level.

In other hand, Also resistance does not always hold and a break above resistance signals that the bulls have won out over the bears. A break above resistance shows a new willingness to buy indicate buyers have increased their expectations and are willing to buy at even higher prices.

Broken Support & Resistance

Support or resistance levels that were tested by the price and sustained the pressure by not allowing market to surpass them, are considered as strong levels. If Support level is broken it becomes future resistance level. If resistance level is broken it plays a role of support for future market moves.