Support & Resistance
The market-generated information is extremely useful for trading or investment decisions.
The price levels that entice buyers to add or accumulate securities are known as support price levels, while the price levels that entice sellers to sell incremental securities are known as resistance price levels.
The most popular type of support & resistance are:
a. Horizontal Support & Resistance:
The support price levels are identified when the securities test a certain price range multiple times & fail to trade below that range. It is usually considered a "buyers zone".
The resistance price levels are identified when the securities test a certain price range multiple times & fail to trade above that range. It is usually considered a "sellers zone".
How to draw Support & Resistance on the chart?
1. Identify the swing high & swing low by looking left on the chart
2. Check if that high or low has got an interest previously by sellers or buyers around those levels
3. Draw horizontal line for the entire shadow range or wick range of those levels
Horizontal Support:
Horizontal Resistance:
Every trader or investor must know the following points about Horizontal Support & Resistance:
1. Multiple times re-test (usually more than 3 times) of the price range indicates the response by the buyer or seller is not aggressive enough & Hence it is most likely to be broken
2. Support once broken, becomes resistance & vice versa
3. It is a high probability setup to enter with low-risk buying at the support level post a bullish candlestick pattern confirmation or sell at resistance post bearish candlestick pattern confirmation with minor stop loss
The trendline support levels are marked when the price moves up in a higher high - higher low (HH-HL) pattern. The upward-sloping line connecting the higher swing lows acts as price support or "buyers zone".
The trendline resistance levels are marked when the price moves down in a lower low - lower high (LL-LH) pattern. The downward-sloping line connecting the lower swing high acts as price resistance or "sellers zone".
Uptrend
Downtrend
How to draw trendline Support & Resistance on the chart?
1. Identify the upward-sloping lows or downward-sloping highs on the chart
2. Mark these higher lows or lower highs on chart
3. Draw upward or downward sloping lines connecting higher lows or lower highs
Upward sloping trendline
Downtrend sloping Trendline
Every trader or investor must know the following points about trendline support & resistance:
1. Higher lows near the upward trendline attract a response from the buyer & lower highs near the downward trendline attracts a response from the sellers.
2. Support once broken, becomes resistance & vice versa
3. It is a high probability setup to enter with low-risk buying at the support level post a bullish candlestick pattern confirmation or sell at resistance post a bearish candlestick pattern confirmation with a minor stop loss
4. The higher lows can also be used for trailing stop loss once a new swing high is made for a long position & lower highs can be used for trailing stop loss once a new swing low is made for a short position
c Dynamic Support & Resistance:
The most popular Dynamic support & resistance are:
a. Moving Average
b. Supertrend
What is a Moving Average in trading?
It is the average market price for a set period of time. The powerful technical tools used by large institutions & traders to filter out "noise" and focus on the larger market trend.
In statistics, the formula used to calculate the average has varied based on the requirement of the analysis & decision-making. For example, whether to use a simple moving average, exponential moving average, weighted moving average, etc. depends on the choice of the trader or investor
Rising moving average support
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Falling moving average resistance
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Every trader or investor must know the following points about moving average based support & resistance:
1. Higher lows near the rising moving average attract response from the buyer & lower highs near the falling moving average trendline attract response from the sellers.
2. Support once broken, becomes resistance & vice versa
3. It is a high probability setup to enter with low-risk buying near the moving average support level post a bullish candlestick pattern confirmation or sell near the falling moving average resistance post a bearish candlestick pattern confirmation with a minor stop loss
4. The higher lows near the moving average can also be used for trailing stop loss once a new swing high is made for a long position & lower highs near falling moving average can be used for trailing stop loss once a new swing low is made for a short position
What is a Supertrend in trading?
It is a technical tool that generates positive trends & negative trends signals. It is calculated using the average true range for a set period & a multiplier to check the trend for the period.
It is a very simple & easy hack to identify the existing trend.
Positive Supertrend
Negative Supertrend
Every trader or investor must know the following points about supertrend based support & resistance:
1. The understanding of the market structure or current price behavior of underlying assets is extremely important for using supertrend technical tool. For example, in a trending market, it helps to ride the trend smoothly on the other hand in a sideways or choppy market the trend change occurs very frequently and leads frequent change in decision making
2. It is a high probability setup to enter with low-risk buying near the positive supertrend support level post a bullish candlestick pattern confirmation or sell near the negative supertrend resistance post a bearish candlestick pattern confirmation with a minor stop loss
