Support and Resistance: How do these two work?

The concepts of support and resistance are one of the most highly discussed among technical analysts. It is also often discussed after understanding the notion of a trend to fully utilize its concepts. At first glance, the value behind them is that it is easy to understand given that they seem to be self-explanatory, but as you venture more in depth, you will soon discover that there is more to learn and they come in different methods.

These words are frequently used by traders to talk about the level of the price seen on charts that could possibly stand as an obstacle, which then averts the value of an asset from going to a specific course/way.

Support can be defined as a level of price wherein a possible downtrend is predicted because of the focus on demand. For example, when the value of a security falls down, the demand for it splurges up. This then, draws the support line.

Meanwhile, Resistance is the contradictory term for support which means that it signifies an area or price level over the market where trading is solid enough to assume that it will eliminate the possibility of the prices from going any higher.

Now that we have defined support and resistance, you might be wondering how to use these concepts in the market.

1. It helps you detect the ideal time as to whether you should sell or buy your current stocks.

-You might think that it is a simple and practical use of support and resistance but it is still one that is used by traders and is shown to be in effect. 

For instance, you would be purchasing stocks as it approaches the support level. By the time, it reaches; there would be an increase in demand than the supply. With that, more people would be chasing after it to buy it, resulting in the increase of price.

On the contrary, traders put their stocks on the market as the price approaches closer to the resistance levels because it is the time where you can sell it at a huge price. When it does reach the resistance level, it is where people would want to sell and thus, the prices of the stocks falls down once more.

2. Recognizing a sturdier support and resistance based on the time frame

-How someone sees and interprets a chart may vary for each person, but it cannot be denied that looking at the whole picture helps the traders get a clue as to the direction of their stocks, and how rough the road will be in order to reach there.

You could probably spot a number of support and resistance levels on the chart basing on their span of time- the long and short ones. The longer the time frame, the harder it is to break the support and resistance levels. For instance, a support on the daily time frame will hold more weight compared to a support on a 5 minute time frame.

3. Helps you identify possible breakouts, resulting to increase in profits

-When resistance levels become ruined, there arises a new support level. But if it does not, it delivers a clue to the traders that a strong demand for the stocks in the market exists.

When breakouts like these happen, it is usually a clue that there may be a rise in the major price trend. This is why it is a good idea to look out for instances like this so you can be able to a trade when the breakouts happen.

About the Author Brian Chai

Brian Chai is an author, investor, trader and entrepreneur. Since his early education days, Brian has always had a keen interest in the finance field. He started out his career as a financial advisor and later went on to work for one of the top investment banks in the world. Capitalizing on his finance and trading knowledge, Brian went on to be a successful trader and investor in the financial market where he achieved massive portfolio gains. Wanting to share his expertise and passion in trading and investing, Brian left his banking job and went on to be a full time trader and his mission is to help people grow their wealth and live their dream life.

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