What are Support and Resistance?

1. Overview of Support and Resistance

Support and resistance are concepts in technical analysis that indicate key levels where prices are likely to reverse. These levels are predicted based on past price movements and function as market turning points. Support is a point where the price is likely to stop falling, and resistance is a point where the price is likely to be prevented from rising. These concepts are widely used by traders to determine entry and exit timings.

2. Characteristics of Support and Resistance

1. Support
   • A support line indicates a price zone where the price is likely to bounce when it has been falling. Demand is strong and selling pressure weakens, making it a point where the price is likely to stop falling.
   • Example: A price zone that has bounced multiple times in the past.
2. Resistance
   • A resistance line indicates a price zone where the price is likely to reverse when it has been rising. Supply is strong and buying pressure weakens, making it a point where the price may be stopped from rising.
   • Example: A rising peak that has reversed multiple times in the past.

3. How to Use Support and Resistance

1. Signs of Trend Reversal
   • If the price bounces off a support line and starts to rise, it suggests a reversal to an uptrend.
   • If the price reverses off a resistance line and starts to fall, it suggests a reversal to a downtrend.
2. Breakout Strategy
   • If the price breaks below a support line, it's a sell signal.
   • If the price breaks above a resistance line, it's a buy signal.
3. Trading in Range-Bound Markets
   • When the market is moving sideways, trading between support and resistance is effective. Consider buying if the price bounces off the support line and selling if it reverses off the resistance line.

4. Practical Examples

• Buy Scenario
  If the price bounces off a support line, predict that the price will rise again and consider a buy entry.
• Sell Scenario
  If the price reverses off a resistance line, predict that the price will fall and consider a sell entry.

5. Dynamic Changes in Support and Resistance

1. Role Reversal
   • If the price breaks below a support line, that line can become a new resistance line.
   • If the price breaks above a resistance line, that line can become a new support line. This is called "role reversal" and is an important phenomenon in technical analysis.
2. Dynamic Adjustments
   • Support and resistance do not always remain at fixed values. These lines can fluctuate depending on market conditions, important economic indicators, and news events.

6. Precautions and Limitations

1. Breaking Through Support and Resistance
   • Support or resistance lines can be broken due to market conditions or major news events. This can lead to sharp price movements, so traders must constantly monitor them.
2. Caution When Using in Range-Bound Markets
   • When the market is trendless and in a range-bound phase, support and resistance lines are often broken, resulting in noise. Caution is required when employing counter-trend strategies in range-bound markets.

7. Summary

Support and resistance are very important technical indicators for identifying price reversals and trend changes. When the price bounces off these lines, traders can determine entry or exit timings. However, support and resistance are not always absolute, and combining them with other indicators and market news can lead to more accurate trading.

By understanding support and resistance strategies and utilizing them at the right timing, you can increase your trading success rate as a professional trader with Fundora.