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"Support and Resistance"
In trading, technical analysis occupies a rather significant position. The most important in technical analysis are the concepts of support and resistance levels, since all technical analysis is based on them.
What is the level of support and resistance;
How to determine the level of support and resistance;
Bounce off the level;
Breakdown of the level.
The support level is a certain accumulation of prices, which are approximately at the same level, hence the name comes from. The support level can be compared to the floor, from which the price repels, below which it does not fall.
Such accumulations are characterized by a market reversal zone. In other words, a support level is an accumulation of price lows that are at roughly the same prices.
If you notice that the market begins to grow in the same places as before, at the same level, then you have identified a support level or a buy zone. Accordingly, when you see that the price of an asset has fallen to the support level, it means an advantageous point for buying an asset.
The resistance level acts as a ceiling for prices. In contrast to the support level, the resistance level acts, which means the accumulation of price highs, which are located approximately at the same level.
The general rule of thumb for resistance levels is that they prevent prices from rising further, acting as a price ceiling. In essence, they encourage traders to take their profits by selling the previously purchased asset, causing the price to fall and the sales to rise.
How to identify support and resistance
There is a wide range of tools and analytical techniques to help identify support and resistance levels, including:
- Previous tops and bottoms;
- Candlestick models;
- Moving averages;
- Trend lines;
- Bollinger lines;
- Fibonacci grid.
Bouncing off the level
A rebound is the most common situation for the market when an asset, having reached a level, reverses.
For example, if an asset has reached a resistance level, then after a rebound, it will move to the nearest resistance level.
Take a look at the chart below: it was difficult for WTI oil to break above $ 55 a barrel. Price bounced off the level several times and later retreated, sending the item $ 7 lower in a short period of time.
Breakdown of the level
A breakout is a situation in which the price does not reverse from the level, but breaks it out. In this case, the market moves until it finds the next level.
For example, the price has come to a resistance level and, in theory, should reverse. But there was a breakdown of the level, and the price continues to rise until it comes to the next resistance level. In addition, after breaking the support level, it becomes a new resistance level. When the resistance level is overcome, it becomes a support level.
Take a look at USDMXN. At 20.00 there was a critical level that many traders looked at. Having broken above it, the pair climbed 2 additional figures, reaching its all-time high at 22.00.
However, the decline has since begun. USDMXN broke below 20.00, rechecked it (support converted to resistance), failed to break above, and then continued downward. This is a typical situation to look for as it gives traders many opportunities to join the trend. In such a situation, the trader can sell the pair after retesting at 20.00.