Education

Support and Resistance

The idea of Support and Resistance is one of the most widely used concepts on the financial market. The concept is one of the most commonly employed tactics in financial markets and allows traders to maximise their potential earnings through their investments. If a trader is able to accurately predict the support and resistance levels, they are given the option to buy a security at its lowest point in any given period of time (the support) and sell it at its highest price in that same period of time (the resistance). This ensures traders can invest in a security when its price is lowest and then sell when it reaches its peak price in any specific timeframe. The point of resistance typically forms as the market begins to sell a security, usually following a period of significant price rise, in order to receive maximum profit. This is known as “profit taking” and it is the primary factor in deciding the resistance level.

To initially understand what horizontal support and resistance is, one must imagine a chart plotting the upward movement of a security’s market price. As the security continues upward, it tends to move in a “zig-zag” fashion, regularly dropping to a certain point on the chart and then rising again. The apex of this movement, the highest point it reaches before dropping back down, is said to be the resistance. Conversely, the lowest point reached prior to a future rise is known as the support. Similarly, the opposite is employed during the downtrend of a market price. It is assumed that the price movement will not break through the support or resistance level, although it will regularly reach these prices.

Of course, in order for a technical analyst to fully capitalise on the benefits of understanding support and resistance, they must first understand how to identify support and resistance levels.  It is crucial, as a result, to understand that support and resistance points are not exact figures or numbers. Instead, it is much more useful to view the support and resistance as areas or zones, rather than fixed and exact figures.

As market prices of securities rarely stay the exact same over time, the support and resistance levels often move as well. The support and resistance levels are identified through use of trendlines and other technical indicators. Traders will scrutinise charts and search for a series of peaks, both increasing and declining and plot a trendline to link these peaks together.

If the price has previously been unable to break through a specific level, these levels can be identified as the support and resistance. The more regularly the price has failed to penetrate these levels, the stronger the support and resistance levels are said to be. As a result, traders will be able to use the support and resistance levels of any given security’s market price as a safe point at which they can buy or sell a security, as they can assume the price will consistently rise or fall from that level.