Support and resistance levels, the bedrock of technical analysis, are fundamental elements. They serve as critical points that delineate potential price movements and are pivotal in decision-making processes for traders and investors alike
The basis:
There are several fundamental concepts in trading that remain the same over a long period of time. Among them, the concepts of support and resistance levels stand out. When used correctly, support and resistance levels improve trading efficiency in financial markets.
Today we will delve deeper into these concepts.
Price behavior:
The fundamental principle of price behavior lies in the concept of supply and demand, governing the existence and operation of any market.When demand outweighs supply, it prompts an upward push in prices, while in reverse circ*mstances, a decrease is observed. By identifying levels of supply and demand, traders significantly enhance their success rate.
A support level indicates a price range where strong buying positions are concentrated, typically defined by two minimum price points.
A resistance level, conversely, denotes a price range around which strong selling positions are clustered, often marked by two maximum price points.
It's important to note that support and resistance levels should not be viewed as precise lines. Prices may not necessarily adhere to these levels point by point; often, they may not even touch the level directly, sometimes piercing through it. This variability is normal, so these levels should be perceived more as zones of support and resistance. The width of these zones can vary, with the magnitude of dispersion dependent on the timeframe in which trading occurs. The higher the timeframe, the potentially broader the range of support and resistance levels.
Once again for strengthening:
Support and resistance levels represent specific price ranges on a chart (often represented by rectangles in my analysis) where the direction of price movement has historically changed. These ranges attract traders' attention because they provide clear points for setting stop losses and entering trades. In addition, these levels usually attract large buyers or sellers whose limit orders contribute to market dynamics.
Essentially, the level denotes the price area in the market where traders perceive the price to be either overpriced or underpriced, depending on the prevailing market conditions. Therefore, it is extremely important to closely monitor key levels where the role of support and resistance has changed or where significant price reversals have occurred.
Blending levels signify pivotal points on a price chart where price action can prompt a reversal in the opposite direction. In the presence of a robust trend, price movements may penetrate through these supply and demand levels, leading to potential shifts in direction. Such occurrences typically coincide with heightened transaction volumes. The interplay of price adjustments, heightened market activity, and trading volumes collectively influence market direction.
When resistance is breached and the price retraces to its previous level, there's a likelihood that bulls will once again push it upwards. Conversely, if the price retraces to the breached level after breaking through support, bears are likely to actively drive it downwards. Support and resistance levels can be identified as areas in the market where traders are more inclined to buy or sell, depending on current market conditions. This creates a zone of collision between buyers and sellers, often prompting the market to change its direction.
Retest:
A retest of a level refers to a brief return of the price to the breached support or resistance line for testing purposes. Following the retest, the price typically continues its movement in the direction of the breakout.
On higher time frames, support and resistance levels become more powerful:
It is important to observe the price action around levels:
- If the price swiftly reverses from a level into the opposite trend, it indicates significant importance of that level.
- If the price tests a specific area multiple times with minor retracements, it's likely that the level will eventually be breached.
- Swing zones refer to areas where the price retraces to the previous pullback in either a downtrend or uptrend. In less robust trends, the price tends to return to the boundary of the previous correction before continuing its movement.
Of course, support and resistance are dynamic concepts that require constant attention and analysis as their meaning changes depending on prevailing market conditions. Moreover, it is critical to consider multiple confirmations such as volume analysis and breakouts to confirm the strength of these levels.
Thank you for your attention!
