How are Support and Resistance levels important?

support and resistance levels

what is support and resistance in technical analysis?

In technical analysis, support and resistance are two important concepts to analyze the price movement of stocks or any asset. Support and resistance levels are important because it influences traders behavior. At these levels traders reacts and make buy or sell decisions. These levels also used to identify potential turning points in the market.

  • Support:

Support is a price level where buying interest emerge and it prevent the price to fall further. In other words its a level where demand for the stock or asset increases which causes up move.

  • Resistance

On the other hand resistance is the price level where selling pressure increases and causes prices not to move further. It is considered as potential reversal in an uptrend.

How are Support and Resistance identified?

These levels can be identified using various methods, including:

Historical Price Data:

Traders analyze price chart to see previous price levels where stock has shown significant buying or selling activity.

Trend lines: By drawing trend lines support and resistance are marked. Up trend line is drawn by connecting higher lows which acts as support where as down trend line is drawn by connecting lower highs which act as resistance.

Moving Averages: Long term moving averages often used as dynamic support and resistance (50 days, 100 days). When prices crosses these levels potential reversal is identified.

Psychological Levels: Some price levels also acts as support and resistance such as round numbers.

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