As you all know 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 these levels to identify the best trade opportunity.
If you want to be a trader, you have to master technical analysis so that you can easily identify trading opportunities and grab them.
The best thing is that when you start learning technical analysis, you will start your learning journey with support and resistance.
What is Support and Resistance?
The concept of Support and Resistance is undoubtedly the most important part of the technical analysis. These levels are the areas where prices react as support levels or resistance levels.
These levels are the areas where buyers and sellers find some 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 the 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 points. 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, the demand for the shares increases, thus forming a new support level. Always remember the support level is always below the current market price.
Let’s 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. 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 the selling pressure of traders or selling interest. As the price of shares rises, the supply of the shares increases, thus forming a new resistance level. The resistance level will be always above the current market price.
See the example below:
The image above shows 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 it easy, we have classified it into 5 categories:
- Demand and Supply zones
- Psychological levels
- Dynamic Support & Resistance
- 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 the price took a break or support is called Demand Zone whereas the area where the price takes resistance is called Supply Zone.
Always remember support or resistance is not just a line, It’s an area or zone.
Here are the steps to follow:
- Take a chart of any stock or index.
- Now identify all the recent swings (Swings means the area from where price reversed)
- Now Draw Horizontal lines at each swing.
- The last step is to draw a rectangle zone between the horizontal lines.
#2 Psychological levels
Most of the time, the price of a stock or index may take support or resistance at round numbers. The logic behind this is most of the biggest players of the market entry 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 an example:
Identifying the key level is another technical skill that you must learn if you want to be a Successful Trader.
Let me explain what trend lines mean.
If the market is on the move making new swing highs and lows, the price will tend to respect a price level that 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 act as support or resistance.
Here are the steps to draw trendlines:
- Take a chart of any stock or index.
- Now Draw lines connecting these swings.
#4 Dynamic Levels
As the name suggests, these levels keep on changing along with price and act as crucial support or resistance levels.
Above all three types of levels at the fixed price point but the dynamic support or resistance keeps on changing with the price.
The best example of dynamic support or resistance is the moving average. The moving Average act as a crucial level. The real market hit moving averages, and it bounces back.
#5 Previous day low and high
Most of the time, the low and high of the previous day also act as a major level. So, we should always keep these levels.
Let us see the example:
Support and Resistance are very helpful for traders to identify trading opportunities and make a profit theme.
However, there is no guarantee stock always respects these levels. As a Trader you have to understand where and when to trade and when not to trade.
I hope you all know 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…