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  • Analysis

28 December 2020,08:01

Analysis

Support and Resistance

28 December 2020, 08:01

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Support and resistance is a concept used within technical analysis that suggests that the market price of an asset will tend to fall and rise at certain predetermined levels.

Support
The support level is the level at which the price tends to find support as It is falling; it is more likely to “bounce” off this point rather than break through it. In the event that a price does in fact break through its support it will often continue to fall until a new support level is identified.

Resistance
Resistance is the opposite of support – the resistance level is the level at which the price tends to find resistance as it is going up, and again, it is more likely that the price will “bounce” off this level rather than break through it.

In the event that a price does break through its resistance level, it will often continue to rise until it finds another resistance level.

The diagram above gives an example of support and resistance levels.

The “zigzag” pattern that we see here has an upwards trend and shows us how new levels of support and resistance are determined as the market moves.

When the market moves up and then pulls back again the highest point before the fall was be identified as the price resistance level.

Similarly as the market then moves up again, the lowest point reached before the increase began is the support level.

The reverse of this is true for a downward trend

How do I find support and resistance?
Now that you have a general idea of what support and resistance levels are it’s time to learn how to identify them.

Unfortunately it’s not as easy as A, B, C – support and resistance levels aren’t exact numbers that can be worked out using a formula or rule. A support or resistance level may appear to have broken but soon after we see that the market was just testing it and the support and resistance levels remain in place.

The fact that support and resistance levels are often depicted as lines, when they are not in fact exact figures is sometimes misleading – so it’s often simpler to think of support and resistance as zones as opposed to definitive levels.

The two types of support and resistance
There are essentially two types of support and resistance – major and minor.

A price can move up for example, breaking the minor resistance in order to test the major resistance and as we can see below often a price move against the trend will be stopped by the minor resistance or support, and reverse.

The more often a price tests the levels of support and resistance without actually breaking through them, the stronger the support and resistance zones are seen to be.

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