As you all know the Support and Resistance are the most important aspect of price action trading and technical analysis. So, in this article we understand What is Support and Resistance and How to draw support and resistance levels.

Many traders use the these levels to identify the best trade opportunity.

If you want to be a trader, you have to master the technical analysis so that you can easily identify the trading opportunity and grab them.

The best thing is that when you start learning technical analysis, you will start your learning journey with the support and resistance.

Let’s begin…

 

What is Support and Resistance?

The concept of Support and Resistance are undoubtedly most important part of the technical analysis. These levels are the areas where price react as support level or resistance level.

These levels are the areas where buyers and sellers find some of chart pattern or buying or selling level, after that they are becoming the major turning points in the market.

These levels are formed when the price reverses and change its direction, and price will respect these levels, in other words, The movement of the price may be tended until the price breaks the level.

In a trending market, support and resistance are formed from low and high swing point. In an uptrend the previous swing point acts as a support level, and in a downtrend the previous swing point acts as a resistance level.

 

What is a Support Level?

Support is a price level where a downtrend can be expected to pause due to buying pressure of traders or buying interest of Traders. As the price of shares drops, demand of the share’s increases, thus forming a new support level. Always remember the support level is always below the current market price.

See the example below for better understanding:

Support

The image above shows that how the previous swing point acts as a support level.

Let’s us suppose If a stock makes the retracement move it respects the previous swing point (support level) which will represent the beginning of another impulsive move.

As you can see, when the market touches the previous swing level (support level) it goes up again.

By drawing a support level in an uptrend market, we can predict when the next impulsive move will be.

 

What is a Resistance level?

Resistance is a price level where an uptrend can be expected to pause due to selling pressure of traders or selling interest. As the price of shares rises, supply of the share’s increases, thus forming a new resistance level. The resistance level will be always above the current market price.

See the example below:

Resistance

The image above shows that how the previous swing point acts as a resistance level.

As you can see, when the market touches the previous swing level (resistance level) it goes down again.

 

How to draw Support and Resistance?

There is no such classification but to make easy, we have classified it into 5 categories:

  1. Demand and Supply zones
  2. Psychological levels
  3. Trendline
  4. Dynamic Support & Resistance
  5. Previous day low and high

 

#1 Demand and Supply zones

These are the stock price zones from where the trend of the share is likely to change. The Area where price took a break or support is called Demand Zone whereas the area where price takes resistance is called Supply Zone.

Always remember support or resistance is not just a line, It’s area or zone.

Demand Zone

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Supply Zone

Here are the steps to follow:

  1. Take a chart of any stock or index.
  2. Now identify all the recent swings (Swings means the area from where price reversed)
  3. Now Draw Horizontal lines at each swing.
  4. The last step is to draw a rectangle zone between the horizontal lines.

 

#2 Psychological levels

Most of times, the price of stock or index may take support or resistance at round numbers. The logic behind is most of the biggest player of the market enter or exit a trade at such round numbers or psychological levels thus making it crucial support or resistance levels.

Let’s us understand with the help of example:

Psychological Levels

 

#3 Trendline

Identifying the key level is another technical skill that you must learn if you want to a Successful Trader.

Let me explain what do trend lines mean?

Trendline

If the market is on the move making new swing highs and lows, price will tend to respect a price level which is identified as a trend line.

Bullish markets will form a support level, and bearish markets will form a resistance level.

To draw a trendline you need at least two swings in a chart. After drawing a line connecting these two points, now we can expect that the third swing at which it touches will likely to be act as support or resistance.

Here are the steps to draw trendlines:

  1. Take a chart of any stock or index.
  2. Now Draw lines connecting these swings.

 

#4 Dynamic Levels

As the name suggest, these levels keep on changing along with price and act as crucial support or resistance levels.

Above all three types of levels at fixed price point but the dynamic support or resistance keeps on changing with price.

Dynamic Levels

The best example of dynamic support or resistance is moving average. The moving Average act as a crucial level. In the real market hit moving averages, and it bounces back.

 

#5 Previous day low and high

Most of the times, the low and high of the previous day also act as a major levels. So, we should always keep these levels.

Let us see the example:

Previous day low and high

 

Conclusion

Support and Resistance are very helpful for traders to identify the trading opportunities and make profit theme.

However, there is no guaranty stock always respect these levels. As a Trader you have to understand where and when to trade and when not to trade.

I hope you all know the How to draw support and resistance. If you have any doubt related to this post, you can comment below this post. We will be happy to help you…