Support and Resistance

Support and resistance is one of the most widely used concepts in trading.

Strangely enough, everyone seems to have their own idea on how you should measure support and resistance.

Support is a price point underneath a market that shows heaviness in 
Buying, Which sufficient enough to prevent prices from falling down.

Resistance is a price point above a market that shows heaviness in Selling, that sufficient enough to prevent prices from rising up

Let’s take a look at the basics first.

Note:

Buying is most ideal either at the bounce of SUPPORT 

.... or at the breakout of an area pattern RESISTANCE,

Selling is most ideal either at the bounce of RESISTANCE

... or at the breakdown of an area pattern SUPPORT.

Look at the diagram above. As you can see, this zigzag pattern is making its way up (bull market).

When the market moves up and then pulls back, the highest point reached before it pulled back is now resistance.

As the market continues up again, the lowest point reached before it started back is now support.

In this way, resistance and support are continually formed as the market oscillates over time. The reverse is true for the downtrend.

Plotting Support and Resistance

One thing to remember is that support and resistance levels are not exact numbers.

Often times you will see a support or resistance level that appears broken, but soon after find out that the market was just testing it.

With candlestick charts, these “tests” of support and resistance are usually represented by the candlestick shadows.

Chart Credits to Investagrams

Notice how the shadows of the candles tested the 405.93 support level.

At those times it seemed like the market was “breaking” support.

In hindsight, we can see that the market was merely testing that level.

So how do we truly know if support and resistance was broken?

There is no definite answer to this question. Some argue that a support or resistance level is broken if the market can actually close past that level. However, you will find that this is not always the case.

Let’s take our same example from above and see what happened when the price actually closed past the 440 support level.

In this case, the price had closed near the support level but ended up rising back up above it.

If you had believed that this was a real breakout and sold this pair, you would’ve been seriously hurtin’!

Looking at the chart now, you can visually see and come to the conclusion that the support was not actually broken; it is still very much intact and now even stronger.

To help you filter out these false breakouts, you should think of support and resistance more of as “zones” rather than concrete numbers.

One way to help you find these zones is to plot support and resistance on a line chart rather than a candlestick chart. The reason is that line charts only show you the closing price while candlesticks add the extreme highs and lows to the picture.

These highs and lows can be misleading because often times they are just the “knee-jerk” reactions of the market.

It’s like when someone is doing something really strange, but when asked about it, he or she simply replies, “Sorry, it’s just a reflex.”

When plotting support and resistance, you don’t want the reflexes of the market. You only want to plot its intentional movements.

Looking at the line chart, you want to plot your support and resistance lines around areas where you can see the price forming several peaks or valleys.

Chart Credits to Investagrams

Other interesting tidbits about support and resistance:

• When the price passes through resistance, that resistance could potentially become support.
• The more often price tests a level of resistance or support without breaking it, the stronger the area of resistance or support is.
• When a support or resistance level breaks, the strength of the follow-through move depends on how strongly the broken support or resistance had been holding.

With a little practice, you’ll be able to spot potential support and resistance areas easily.

Source: www.babypips.com