Support and Resistance Levels

A good way to understand support and resistance trading is to picture a man trying to get past a certain line but a fence is blocking his way. Though he will keep going along the fence but will not be able to pass it. The fence represents what is called “support and resistance levels”.

An upper blockage, appearing at the end of a bullish trend, is a resistance point. It represents the point at which sellers outnumber buyers and the price starts to go back down. A lower blockage, appearing at the end of a bearish trend, is a support point. At this point, the price has reached a momentary low and will start going up, at least for the time being.

As can be seen in the chart above, the big advantage of support and resistance levels is that they can be easily distinguished. They do not require high levels of chart analysis and for that reason can be used by both skilled and novice traders. Keep in mind that resistance and support levels are not exact lines but zones. The exact point at which they occur cannot be determined.

The barriers caused by the resistance and support levels do not last forever and our job is to determine which levels we can trust and which have a high probability of breaking. This is not an exact science but with a proper understanding of the market and the use of some technical analysis, this method has very high odds of working. Levels that have proven themselves at least three times in a row are considered more trustworthy.

Going back to our man, if at some point he manages to cross the fence he might now find himself stuck on the other side. Correspondingly, a resistance level, once cracked, can turn into a support level and a support level into a resistance level. An example of this phenomenon can be seen in the chart below:

When a support level breaks, the decline accelerates