Support and resistance levels are two fundamental concepts in technical analysis. These are essential tools that involve analyzing historical price data and identifying patterns and trends to help make forecasts of future price movements and sound trading decisions.
Support indicates the price level of a security or asset that is likely to find buying interest, driving the price down further. Furthermore, it represents a level at which demand for an asset is considered stable enough to combat selling pressure, leading to a recovery in its price. Support levels are commonly seen as horizontal lines or zones on a price chart, showing where values previously reversed from a downtrend to an uptrend.
Meanwhile, the resistance shows that the price level will likely face selling pressure that could limit the price increase. Additionally, it represents the point at which the supply of the asset exceeds the demand, which can cause price fluctuations. Unlike support, horizontal resistance lines show the change in direction from an uptrend to a downtrend.
Before using support and resistance, you must first understand the typical asset movements. It would help to better interpret the support and resistance of the framework.
When using support and resistance, the primary trading method is to buy near support in uptrends or when prices move up and sell near resistance in downtrends or when prices move down.
Support and resistance levels help indicate the direction of a trend. Support levels usually show possible entry points for buying in an uptrend, while resistance mainly indicates possible exit points for selling in a downtrend.
In downtrends, resistance can provide opportunities to enter short positions. Meanwhile, support levels can be potential targets for stock selling or reversal signals.
Although buying and selling based on these levels can pay off, there is no guarantee that support or resistance will hold.
Remember that support and resistance are dynamic, so traders' trading decisions must also be aggressive.
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