What is Support?
- Price moves in a series of Peaks and Dips.
The direction of peaks and troughs determines the trend of the market. - Reaction lows of the market are called support. Support is a place where price halts and goes back up.
Why Price Moves up from Support?
Support and Resistance In an Uptrend market
- Price moves up from support because of the buying pressure or you can say buyers are significantly more than sellers that's why prices move up from the support.
What is Resistance?
- Resistance is the opposite of Support and is a place where the price goes down from that level.
Support and Resistance in a downtrend market
Reversals of Support and Resistance
- Support and Resistance can be defined as the previous lows and highs.
- When support levels are penetrated by a significant amount Support levels can become the upcoming resistance levels.
- The same goes for resistance when resistance levels are penetrated by a significant amount Resistance Levels can become support.
Resistance becoming Support after penetration of a significant amount.
The psychology behind Support and Resistance
- To understand this let’s divide the market into three players the buyers, the shorters and the uncommitted ones.
- If the market starts to move higher from a support area the buyers would be delighted but would regret not buying more quantities.
- Same way the shorters would realise they are on the wrong side of the market and would wait for the price to come to the support levels so that they can break even their trades and they would buy at the support levels as they had earlier taken the short positions.
- This would strengthen the support levels. More the trading that takes place at support levels more it strengthens it making the support level a significant level on the charts.
- Uncommitted ones can be the people who have taken the positions earlier and now they are squaring it off.
Importance of Round Numbers in Support and Resistance
- There is a tendency for a stock price to move up or down from the round numbers.
- Some Traders give importance to round numbers such as 10, 20, 50, 100, 500, 1000 and so on.
- One Should avoid Placing Orders at these obvious round numbers or should square the positions.
- If a trader is trying to buy a commodity or crypto it would make perfect sense that the order should be placed after an obvious round off number.
Some Important Tips:
Support and Resistance Should be learned just after learning candlesticks as all the price patterns are derived from the concept of support and resistance.
Support line and a Resistance line become more significant and valid when it reverses back a third time from its support or resistance levels.
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