Using support and resistance is one of the most widely used strategy in analyzing a trend in a technical analysis. This can be used to any charts regardless of what investment data is being analyzed – stocks, commodities, Forex, etc.
Experienced and newbie trader or investors may be able to spot support and resistance by simply looking at any chart however interpretation may vary depending on the contextual observation of the trader or investor. Yet, its concept are all the same.
What is actually support and resistance? Let’s rely on Wikipedia.org to understand its definition verbatim. By definition, a support is a level where the price tends to find support as it falls. This means that the price is more likely to “bounce” off this level rather than break through it. However, once the price has breached this level, by an amount exceeding some noise, it is likely to continue falling until meeting another support level. A resistance on the other hand is the opposite of a support level. It is where the price tends to find resistance as it rises. Again, this means that the price is more likely to “bounce” off this level rather than break through it. However, once the price has breached this level, by an amount exceeding some noise, it is likely to continue rising until meeting another resistance level. Nose bleed? Yup, it is quite difficult to digest by word but below sample diagram might be able to help you understand it better.
The diagram shows a pattern of an uptrend (termed as bull market in financial investment). Before the trend continues to go upward, it pulls back for a couple of times forming a zigzag before breaking to another new high. As it breaks higher, another zigzag pattern was formed. The top level formation is the resistance point while the bottom part is the support level. The same case is true in a downtrend (termed as bear market). Below is a sample chart showing the concept in real chart.
Photo Source: Google images search – “support and resistance”
Identifying support and resistance is quite a challenge especially if you are looking at a live chart since there is no definitive exact point or number in each trend.
So how can support and resistance become useful in trading?
Support and resistance is so powerful that it can provide technical trader a picture on what is the general direction of the trend. Knowing on what are the possible level a certain price is going to bounce increases the probability of the trader of entering a trade at the right moment. Support and resistance are the points or levels where each trend tend to bounce back and it touches for several times before it breaks. Normally, traders or investors investment strategy is to buy when the trend touches the level of support and sell once the trend reaches the resistance point. However, misinterpretation of support and resistance might result in a failure especially if there are no other supporting indicators to back up the trend analysis.
Spotting support and resistance is easy however interpretation depends on each trader or investor. They must exercise caution at all times and employ strategy that fits their personality. Additionally, they can use other supporting tools to supplement their analysis and at the end of the day, experience and proper mindset is the key in becoming a successful trader.
Learning support and resistance is easily accessible through google search. Try to learn more and trade safely.