Support and Resistance Levels
This is one of the most widely used concepts in stock trading and it refers to levels on a stocks chart that tend to act as barriers that prevent the stocks price of an asset from getting pushed beyond a certain point in a particular direction.
Support
This level prevents the stocks price of an asset from getting pushed downwards and therefore it is regarded as the floor because it prevents the stocks market from moving downwards past a certain point.
Example:
On the stocks example illustrated and explained below you can see that stocks price moved down until it hit a support
Once stocks price hit this level it slightly bounced back up, then resumed going down until it hit the support again.
This process of hitting a level and bouncing back is called testing the support.
The more times a support is tested and the stocks market bounces up the stronger it is - the stocks example illustrated and explained below this level was tested three times without breaking. Finally the stocks market stocks trend reversed and started moving in the opposite direction.
Once this level has been determined traders use it to place their stocks orders to buy the stock at the same time putting a stop loss a few pips below it.
In the stocks example above the stocks market did not move below this area. It is an area where stocks price cannot break lower.
These regions form good points where stocks price trend in a downward trend is likely to reverse and get support and start moving upwards.
The demand to buy the stock at this point will be greater and therefore providing a good point to start a buy stocks trade, while placing stops some pips just below.
This support is also use by short stocks sellers as a target where to set their take profit for their short sell stock trades.
This is another reason why the stocks trend is likely to reverse or consolidate at this level because once the sellers close their sell stock trades then momentum of the downward stocks trend reduces and a consolidation will happen after which the direction is likely to reverse.
Resistance
This level prevents the stocks price of an asset from getting pushed upwards these levels are therefore regarded as the ceiling because these levels prevent the stocks market from moving upwards
Example:
On the stocks example illustrated and explained below you can see that stocks price moved up until it hit a resistance.
Once stocks price hit this level it retraced slightly the resumed going up until it hit the resistance again.
The resistance holds and is tested five times without breaking.
The more times a resistance is tested the stronger the it is.
Once this level has been determined traders put their stocks orders to sell at this level and at the same time putting a stop loss a few pips above it.
In the stocks example above the stocks market did not move above this area. This region shows an area where stocks price cannot break above.
These levels form good points where a stocks price in an upward stocks trend is likely to reverse after some resistance and start moving downwards in the opposite direction.
This shows that the demand to sell the stock at this region will be greater and therefore providing a good point to start a sell stocks trade, while placing stops some pips just above this level.
This resistance is also used by buyers as a target where to set their take profit for their bullish trades. T
his is another reason why the stocks trend is likely to reverse or consolidate at this level because once the buyers close their sell stock trades then momentum of the upward trend reduces and a consolidation will happen after which the direction is likely to reverse and start moving down.
