For this post, I’m gonna be going through 5 reasons why support and resistance work so well. It is without a doubt that they are one of the most commonly used methods by traders and investors all around the world. But before we begin, remember to subscribe and give my videos a thumbs up if you like them. Also visit my main website for more cool stuff like free workshop, trading community, signals and alerts, mentorship, coaching and that kinda stuff.
Alright so lets get right into it. The one over arching mother of all reason why support and resistance work is because it is based on mass psychology. And you will later see that the 5 reasons I am going to explain all link back to this. In fact most of trading work based on mass psychology because the more people believe that the price is going to reverse at the support, the more number of people are going to buy at that price and it becomes a self fulfilling prophecy.
That is what it really is about and it is the crux of support and resistance. In fact support and resistance form because they are a visual representation of the general belief of the trading population. They can only happen when majority of people believe that a certain price will hold solid which will turn that price into support or resistance.
Ok so now that we know the main rationale behind why they work. Lets get into the first reason which is that they are easy to use. We all know there are thousands of indicators and patterns and all sorts of information out there in the trading world and to some extent, they all work given the right circumstances.
The keyword here is given the right circumstances. And sometimes it can be difficult to spot that right circumstance which is why some of those indicators are not so easy to use. Support and resistance on the other hand are very very easy to use and are used by pretty much everyone. From a beginner who just started trading all the way to the hedge fund managers or investment bank analyst. And because everyone is using them, the chances of it working is higher which is why they work so well.
Reason number 2 is that they are easy to spot. Support and resistances can be found all over the charts easily without having to add in indicators or use complex tools. This makes it much easier to use unlike other strategies which relies on more than 1 setup. Take for instance price divergence where you have to compare the price on the chart itself with another indicator and look for divergence between the 2.
It can be difficult to use for those that are not skilled enough. But support and resistance? Anyone can pretty much use it all day any day. Quick pro tip here is that when you are drawing support or resistance lines, remember to always draw candle wick to candle wick and candle body to candle body. Sometimes you won’t get it to line up perfectly but it is a good practice to do so don’t sweat it if it doesn’t fit 100%
Reason number 3 is because they represent key areas of supply and demand. Imagine if the price reversed sharply twice in a row at say 1000. The next time the price gets closed to 1000 again, most people are going to look back in time to see how price behaved and they will see that prices bounced off the 1000 mark.
Now in their mind they will know that 1000 is a solid support because price reversed strongly twice at that level so it has become a significant level to watch out for. Traders that are looking to enter into a long position are going to want to enter at the price. Short sellers who already have a position will want to exit at that price as well because they know the chances of price going below 1000 is low as it has become a solid support.
Reason number 4 is that they are the bread and butter of price action. Price action is a strategy that believes price is the ultimate indicator which is why traders using this strategy will rely on price to base their trades on. This is because according to the efficient market hypothesis, prices already reflect all information available in the market.
So every price action traders out there are going to be using the same support and resistance levels to base their trades on. And because more people are using it, it plays out how they expect it to.
Last reason number 5 is that they are used in many different strategies and patterns. It is like you got some inception going on here. You will start to see support within a support. And the reason why these patterns work is because people believe and expect the support and resistance levels to hold.
Take for example the double top pattern. The 2nd top takes place because likely there was a strong reversal at the first top so more people are expecting history to repeat itself. And if it takes place again then u got a triple top.
You can also see this happening in ascending triangle.
This is usually seen in a bullish market where price is going up but hits a resistance level so it starts to back down and consolidate before breaking out. And you can see that usually each time price goes back down, it goes down lesser and lesser and theres an upward slope.
What happens here is that initially price hits the resistance and people expect it to go back down but it goes back up and hit the resistance again and again. But each time it goes back up to hit the resistance, people are losing faith in the resistance which is why eventually the price gets narrower and narrower until it breaks out.
The breakout happens because people who initially thought the resistance would hold are not switching sides to thinking that price will break through it after seeing multiple failed attempts for price to go down.
So those are my 5 reasons on why support and resistance work. Let me know what are your thoughts on this. Leave a comment below if you have other reason on why they work. Also subscribe to my YouTube channel and visit my website for more cool stuff.