Support and Resistance and Why They Matter

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In essence support and resistance levels are the floors and ceilings that price levels find hard to pass.  They come in various forms and are caused by various technical factors, like historical price levels, strong round numbers (like 100 etc.) moving averages, candlestick formations, trend lines and Fibonacci numbers (A set of mathematical numbers that exist in nature, intimately linked to the golden ratio - see the section on Fibonacci retracement).  

To confuse matters these levels are not necessarily horizontal as they can be formed by trend lines and moving averages (mentioned above), there can be many of them at the same time and just to round things off certain price levels can act as support AND resistance. What this means is if a security manages to push down through a support level of 100 to 90 and some weeks later trends back up, this 100 level can now be resistance.

Well study the basics here of horizontal and moving average support and resistance and delve into more complex technical analysis in later modules.

What is Support and Resistance

The financial markets are driven by supply & demand.  So when we see an up trend within a chart, demand exceeds supply driving prices higher and vice-versa with a down trend. Support & Resistance are price levels within the market, where the supply and demand dynamic changes – i.e. supply surpasses demand at the top resistance level, stopping prices from rising and demand surpasses supply at support, stopping prices fall. 

Support – There is enough demand at a price to keep prices from falling. If demand exceeds supply prices will rise

Resistance – NOT enough demand at a price to keep prices rising. Once supply outstrips demand prices fall.

What Determines Support and Resistance levels?

Support & Resistance levels can be seen in a trading range as well as within trends. In the below example of a trading range we can see that the price bumps on specific high and low prices. i.e. Demand isn’t there above a price of 43.5, but there is demand for price of 34 or higher. These support and resistance levels may have be taken from historical prices, or from other technical analysis like Moving Averages & Fibonacci retracements.  They tend to be psychological levels of supply and demand and when each one is broken, new levels come into play.  Very common numbers are often round numbers like 50, 100, 1000, 5000 etc...  These are numbers with psychological merit for buying and selling.  See The Psychology of Support and Resistance for more reading.

Support and Resistance Levels Forming a Trading Range

In a trend we may also see Support and Resistance, where prices hit subsequent lower levels and lower highs or higher lows and higher highs.   A very simple trading strategy revolves around Support & Resistance.  Traders often like to trade the channel created by support and resistance levels - Buy at levels of support and Sell at Levels of resistance. We'll go on to talk about this in the next Modules.  In our example of support and resistance in a trend we can see a definite down trend making lower lows and lower highs.  Attaching trend lines to these peaks and troughs forms a channel and support and resistance levels (See The Importance of Trend and trend Lines).  You can now see that support and resistance prices change over time.

Support and Resistance Levels Forming a Trend Channel

To determine support and resistance levels it’s important to look at multiple points where a price has been touched or where increasing/decreasing price levels are being touched in a trend. The more the price level or levels are being touched then the more valid the levels. Support & Resistance is also thought to be more valid on a long-term chart - If it’s backed up on a hourly chart then all the better.  As long as price remains within these boundaries the trend is likely to continue.  If the price breaks from the channel, it doesn't necessarily mean a trend reversal.  It could mean the trend has just accelerated.  Further technical analysis is needed to confirm this.

Support becoming Resistance and Vice-versa

As mentioned in the introduction support and resistance can become the same thing at different times.  Once one of them is broken the roles are reversed, so support becomes resistance and vice-versa.  As soon as price moves past one of these levels the supply and demand dynamic has changed, but it's important that the price moves and closes through the level.  Many times a price will move through important support and resistance levels to retrace the same day, or even over a few days.

In our example above, we'll go back to the "Support and Resistance Levels Forming a Trading Range" chart.  You can see that 43.5 was a support level until mid Sept.  The supply/demand dynamic changed with sellers willing to sell at each lower price until the supply/demand equilibrium is restored at a price of 34.  Now 43.5 has become the level of resistance and the top of the range. This switch in S&R can become an effective trading strategy. See 'Playing The Re-Test of Support & Resistance' for more info.

Moving Averages as Support and Resistance

As already mentioned Moving averages can act as support and resistance levels. Now we go on to study Moving averages in future modules, so we won't delve too deep here on how they are calculated. For the meantime all we need to know is that these moving averages are simply lines on a chart showing the average price value over a period of your choosing - 5, 10, 20, 50, 100, 200-periods etc...

In the below example we've drawn a 200-day moving average on the GBP/USD cross currency chart. Used as trendline support, the simple moving average actually acts as the support for a long term channel.  As price gets closer to the moving average, traders look closely to see whether it will bounce back away from it or break that barrier, just as with any other support and resistance level. And, as price moves further away from its moving average, the trade becomes ever more risky as price is thought to be out at an “extreme” (since the moving average is still an average, logic suggests that eventually it and price will meet again at the same level).

One such buying opportunity comes at point X. At this point, the trade would be entered at 1.97552, located on the moving average. Riding the position higher, the opportunity turns profitable as the trade tops out at 2.1179, approximately 1,400 pips later.  Also look how at the left of the chart the 200-day MA acts as resistance, before a market shock took the price over the 200-day MA.  We also see new resistance forming the top of a channel.

GBP/USD 200-day Moving Average as Support and Resistance

Support and Resistance 'Zones'

Technical analysis is not an exact science and each market and circumstance has its own characteristics - analysis should reflect the intricacies of the market. Sometimes, exact support and resistance levels are best, and, sometimes, zones work better. Generally, the tighter the range, the more exact the level. If the trading range spans less than 2 months and the price range is relatively tight, then more exact support and resistance levels are best suited. If a trading range spans many months and the price range is relatively large, then it is best to use support and resistance zones. These are only meant as general guidelines, and each trading range should be judged on its own merits.

So why do they matter?  

They matter because ALL traders are looking at them and they're ALL looking at pretty much the same ones.  Many traders will use pending orders to buy or sell and quite often these buy and sell orders will be placed at important support and resistance levels.  So, traders make trading decisions based on these levels - buying at support and selling at resistance.  It then understandable that identification of these important levels is key to technical analysis and once they have been broken the the supply and demand relationship of the market may have changed.  See The Psychology of Support and Resistance for more reading.


A Trader's View of Support & Resistance

Identifying Support and Resistance is fairly straight forward enough to do on all chart timeframes IMHO. The key is the price reaction at those areas. At it's simplest anytime there's a rally the base of the rally can be called Support on the chart, Buyers supported that area by buying. Vice versa for selling. The more times the support/resistance area is retested the more valid your support/resistance is. Please note that I see Support/Resistance as areas and not one price.

I find the harder part to my trading is to know how to trade that support/resistance. There's always the old chestnut of "Buy at Support and Sell at Resistance" but you never really know if it's support until after you've bought and there's also the chance that support won't be fully tested so you're not in a position to buy. Maybe It should read "Buy at or near Old Support and Sell at or near Old Resistance" but I do believe that it's the best place to buy or sell as it gives me natural areas in which to place stops i.e. under said support if buying.

To help get a feel for market direction I look at the price reaction at those support/resistance areas that I've identified. If I see the market go up 70 points in 2 days from the support area and at resistance only goes down 20 points in 3 days. I'd say that demand was present at support but didn't see supply present itself in such a fashion at resistance. Therefore my outlook for that timeframe would be more bullish than bearish. I would feel more comfortable buying at/near support than selling at/near resistance. I also find that timeframes are very important to my trading as what often appears to be a major support area on a daily chart might be nothing more than a correction on a weekly/yearly chart. The longer term support/resistance areas are most important to my trading. e.g. Support on a 5 minute chart is nowhere near as important as on a yearly chart. If support/resistance areas tie up on more than one timeframe then you have a tradable market IMHO. For each timeframe I decide whether I'm Bullish, Neutral or Bearish and it's often the case that I'm Bullish on the weekly chart and Bearish on the daily chart for the same equity.

I personally find that once the resistance area is broken a very profitable area to enter long is at the retest of that old area, hence the adage "Old resistance becomes new support" and vice versa for Resistance. There's a number of questions that need to be answered when I trade off support/resistance and as with anything the more I trade the better/more confident I get at answering them. I'd also say that my approach is very subjective and I have to make many "Judgement Calls" on what I see around the support/resistance areas. I would love to find a non-subjective system but have yet come across anything which does not require the trader to use his/her judgment when deciding to buy/sell.

I hope this helps, Dan


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In essence support and resistance levels are the floors and ceilings that price levels find hard to pass.  They come in various forms and are caused by various technical factors, like historical price levels, strong round numbers (like 100 etc.) moving averages, candlestick formations, trend lines and Fibonacci numbers (A set of mathematical numbers that exist in nature, intimately linked to the golden ratio - see the section on Fibonacci retracement).  

To confuse matters these levels are not necessarily horizontal as they can be formed by trend lines and moving averages (mentioned above), there can be many of them at the same time and just to round things off certain price levels can act as support AND resistance. What this means is if a security manages to push down through a support level of 100 to 90 and some weeks later trends back up, this 100 level can now be resistance.

Well study the basics here of horizontal and moving average support and resistance and delve into more complex technical analysis in later modules.

What is Support and Resistance

The financial markets are driven by supply & demand.  So when we see an up trend within a chart, demand exceeds supply driving prices higher and vice-versa with a down trend. Support & Resistance are price levels within the market, where the supply and demand dynamic changes – i.e. supply surpasses demand at the top resistance level, stopping prices from rising and demand surpasses supply at support, stopping prices fall. 

Support – There is enough demand at a price to keep prices from falling. If demand exceeds supply prices will rise

Resistance – NOT enough demand at a price to keep prices rising. Once supply outstrips demand prices fall.

What Determines Support and Resistance levels?

Support & Resistance levels can be seen in a trading range as well as within trends. In the below example of a trading range we can see that the price bumps on specific high and low prices. i.e. Demand isn’t there above a price of 43.5, but there is demand for price of 34 or higher. These support and resistance levels may have be taken from historical prices, or from other technical analysis like Moving Averages & Fibonacci retracements.  They tend to be psychological levels of supply and demand and when each one is broken, new levels come into play.  Very common numbers are often round numbers like 50, 100, 1000, 5000 etc...  These are numbers with psychological merit for buying and selling.  See The Psychology of Support and Resistance for more reading.

Support and Resistance Levels Forming a Trading Range

In a trend we may also see Support and Resistance, where prices hit subsequent lower levels and lower highs or higher lows and higher highs.   A very simple trading strategy revolves around Support & Resistance.  Traders often like to trade the channel created by support and resistance levels - Buy at levels of support and Sell at Levels of resistance. We'll go on to talk about this in the next Modules.  In our example of support and resistance in a trend we can see a definite down trend making lower lows and lower highs.  Attaching trend lines to these peaks and troughs forms a channel and support and resistance levels (See The Importance of Trend and trend Lines).  You can now see that support and resistance prices change over time.

Support and Resistance Levels Forming a Trend Channel

To determine support and resistance levels it’s important to look at multiple points where a price has been touched or where increasing/decreasing price levels are being touched in a trend. The more the price level or levels are being touched then the more valid the levels. Support & Resistance is also thought to be more valid on a long-term chart - If it’s backed up on a hourly chart then all the better.  As long as price remains within these boundaries the trend is likely to continue.  If the price breaks from the channel, it doesn't necessarily mean a trend reversal.  It could mean the trend has just accelerated.  Further technical analysis is needed to confirm this.

Support becoming Resistance and Vice-versa

As mentioned in the introduction support and resistance can become the same thing at different times.  Once one of them is broken the roles are reversed, so support becomes resistance and vice-versa.  As soon as price moves past one of these levels the supply and demand dynamic has changed, but it's important that the price moves and closes through the level.  Many times a price will move through important support and resistance levels to retrace the same day, or even over a few days.

In our example above, we'll go back to the "Support and Resistance Levels Forming a Trading Range" chart.  You can see that 43.5 was a support level until mid Sept.  The supply/demand dynamic changed with sellers willing to sell at each lower price until the supply/demand equilibrium is restored at a price of 34.  Now 43.5 has become the level of resistance and the top of the range. This switch in S&R can become an effective trading strategy. See 'Playing The Re-Test of Support & Resistance' for more info.

Moving Averages as Support and Resistance

As already mentioned Moving averages can act as support and resistance levels. Now we go on to study Moving averages in future modules, so we won't delve too deep here on how they are calculated. For the meantime all we need to know is that these moving averages are simply lines on a chart showing the average price value over a period of your choosing - 5, 10, 20, 50, 100, 200-periods etc...

In the below example we've drawn a 200-day moving average on the GBP/USD cross currency chart. Used as trendline support, the simple moving average actually acts as the support for a long term channel.  As price gets closer to the moving average, traders look closely to see whether it will bounce back away from it or break that barrier, just as with any other support and resistance level. And, as price moves further away from its moving average, the trade becomes ever more risky as price is thought to be out at an “extreme” (since the moving average is still an average, logic suggests that eventually it and price will meet again at the same level).

One such buying opportunity comes at point X. At this point, the trade would be entered at 1.97552, located on the moving average. Riding the position higher, the opportunity turns profitable as the trade tops out at 2.1179, approximately 1,400 pips later.  Also look how at the left of the chart the 200-day MA acts as resistance, before a market shock took the price over the 200-day MA.  We also see new resistance forming the top of a channel.

GBP/USD 200-day Moving Average as Support and Resistance

Support and Resistance 'Zones'

Technical analysis is not an exact science and each market and circumstance has its own characteristics - analysis should reflect the intricacies of the market. Sometimes, exact support and resistance levels are best, and, sometimes, zones work better. Generally, the tighter the range, the more exact the level. If the trading range spans less than 2 months and the price range is relatively tight, then more exact support and resistance levels are best suited. If a trading range spans many months and the price range is relatively large, then it is best to use support and resistance zones. These are only meant as general guidelines, and each trading range should be judged on its own merits.

So why do they matter?  

They matter because ALL traders are looking at them and they're ALL looking at pretty much the same ones.  Many traders will use pending orders to buy or sell and quite often these buy and sell orders will be placed at important support and resistance levels.  So, traders make trading decisions based on these levels - buying at support and selling at resistance.  It then understandable that identification of these important levels is key to technical analysis and once they have been broken the the supply and demand relationship of the market may have changed.  See The Psychology of Support and Resistance for more reading.


A Trader's View of Support & Resistance

Identifying Support and Resistance is fairly straight forward enough to do on all chart timeframes IMHO. The key is the price reaction at those areas. At it's simplest anytime there's a rally the base of the rally can be called Support on the chart, Buyers supported that area by buying. Vice versa for selling. The more times the support/resistance area is retested the more valid your support/resistance is. Please note that I see Support/Resistance as areas and not one price.

I find the harder part to my trading is to know how to trade that support/resistance. There's always the old chestnut of "Buy at Support and Sell at Resistance" but you never really know if it's support until after you've bought and there's also the chance that support won't be fully tested so you're not in a position to buy. Maybe It should read "Buy at or near Old Support and Sell at or near Old Resistance" but I do believe that it's the best place to buy or sell as it gives me natural areas in which to place stops i.e. under said support if buying.

To help get a feel for market direction I look at the price reaction at those support/resistance areas that I've identified. If I see the market go up 70 points in 2 days from the support area and at resistance only goes down 20 points in 3 days. I'd say that demand was present at support but didn't see supply present itself in such a fashion at resistance. Therefore my outlook for that timeframe would be more bullish than bearish. I would feel more comfortable buying at/near support than selling at/near resistance. I also find that timeframes are very important to my trading as what often appears to be a major support area on a daily chart might be nothing more than a correction on a weekly/yearly chart. The longer term support/resistance areas are most important to my trading. e.g. Support on a 5 minute chart is nowhere near as important as on a yearly chart. If support/resistance areas tie up on more than one timeframe then you have a tradable market IMHO. For each timeframe I decide whether I'm Bullish, Neutral or Bearish and it's often the case that I'm Bullish on the weekly chart and Bearish on the daily chart for the same equity.

I personally find that once the resistance area is broken a very profitable area to enter long is at the retest of that old area, hence the adage "Old resistance becomes new support" and vice versa for Resistance. There's a number of questions that need to be answered when I trade off support/resistance and as with anything the more I trade the better/more confident I get at answering them. I'd also say that my approach is very subjective and I have to make many "Judgement Calls" on what I see around the support/resistance areas. I would love to find a non-subjective system but have yet come across anything which does not require the trader to use his/her judgment when deciding to buy/sell.

I hope this helps, Dan


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