3 minute read
Support and resistance are key concepts that help professionals identify and understand price levels on charts that act as barriers, preventing the price of an asset from getting pushed in a certain direction.
Identifying support and resistance levels is one of the most fundamental skills involved in technical analysis. Once I learned to use support and resistance effectively, it was like a window opened to the markets and I could finally understand what was happening. I looked at the markets and looked at the charts and it started to make sense.
Let’s look at the basic principles of support and resistance.
An Overview of Support & Resistance
Support describes a zone or price level on the chart under the current market price of an asset where, historically, buying interest is strong enough to overcome selling pressure. In other words, where the price of an asset pauses or stops falling due to demand in the market. Support levels indicate where there will be a surplus of buyers.
Resistance represents a price level or area above the current market price of an asset where selling pressure may overcome buying pressure. It is where the price of an asset moves up and then pulls back. Resistance levels indicate where there will be a surplus of sellers.
The Battlefield Analogy
To better illustrate the concept of support and resistance, in the Trade Like A Pro course we use the analogy of a battlefield between two warring armies. We call one army The Bulls and the other army The Bears. The Bulls create the support side of the battlefield and The Bears create the resistance side of the battlefield. Each is fighting to defend their line.
The Bulls, lined up in the trenches along the support line, send out soldiers to move the price action up. The Bears, lined up in the trenches before the resistance line, send out their soldiers to move the price action of an asset back down.
The area between where support and resistance exist is where we observe the battle: the price action of an asset. Each side wants to overrun the lines of the other side and break-through into “no-mans land.” Each side defends their line, pushing back any breakouts into the accepted price regions.
Finding support and resistance involves determining what prices define the trading range. Finding the most important ones can take many hours of practice but once you learn to identify them they can give us an obvious area to look to initiate a trade or a stop-loss point or an obvious area where for entry and exit.
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In March of 2020, skills like identifying support and resistance lines and trading ranges, helped the Mastermind Group minimize or avoid the market correction.
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