Trading is a lot more difficult if you aren’t focused on learning about all of the tools that are at your disposal. There are plenty of indicators and tools out there to choose from, but some are universally accepted in the trading community and always seem to make there way into a trader’s toolset. Before you dive into the world of Fibonacci retracement tools and other complex indicators, it’s a good idea to start with the basics.
Support and resistance are perhaps one of the best tools to use if you are a trader focused on price action. They are one of the most popular indicators used in technical analysis for several reasons. These horizontal lines provide us with a way to visually analyze price levels for a security on a chart. We can use support and resistance to define risk-reward ratios, determine trade entries and exits, and get a nice view of where the price trend might be going for a security. In essence, support and resistance are areas on a stock chart that act as price barriers. Let’s take a look at some of the basics of support and resistance below.
What is Support?
Have you ever seen a stock that is rapidly dropping in price only to notice that the selling slows down dramatically at a certain point? This is what is referred to as the support level for a security. Support is defined as the price level where a downtrend in price stops due to high buyer demand. Think of it like this – as the price of a security falls, the number of buyers that are willing to pay lower prices increases. That is where the horizontal support line forms on the chart.
Support levels act as a floor for a security and prevent the price from falling any further. Whenever you are trying to map out support lines on a chart, you want to ensure that the security price has touched the support trend line at least three times. The fewer times that the price touches the support line, the weaker that area of support is. The stronger your support line is, the more confident you should be about using it for trade entries and exits. The same holds true for resistance lines as well.
What is Resistance?
Resistance is essentially the opposite of support. It’s an example of using a horizontal trend line to identify when buyers are weakening in the market. Resistance lines act as a ceiling and prevents the price of a stock or security from going any higher. When prices are increasing for a security, they usually meet resistance at a certain price due to a sell-off. Resistance lines are helpful for entries and exits of trades because the price usually does one of two things when it is around a resistance level. It can bounce back down after it hits the resistance level or it can smash through the resistance level and lead to a breakout.
Resistance levels tell you that there is a concentration of supply at a certain price. It’s important to note here that being able to recognize support and resistance levels on a chart is an essential component of technical analysis. Trading without support and resistance lines is essentially like flying blind with your trades.
The Benefits of Using Support and Resistance
There are plenty of benefits when you are fully able to comprehend support and resistance trend lines. You will be able to identify bounces or reversals, find better trade targets, measure breakouts, trade breakouts, and improve your trading overall. It takes some practice to master, but once everything clicks you will be able to view a stock chart and recognize the support and resistance lines immediately.
It’s important to remember that the majority of traders are using support and resistance lines to guide their trades. That means recognizing these price levels are crucial from a psychological perspective since there are a lot of eyes watching the price of a security around these levels. If you aren’t using support and resistance lines in your technical analysis, you should start practicing sooner rather than later. They can provide a great visual tool that helps you make better trading decisions and understand how the market is reacting to prices at key levels.