THE BASICS OF SUPPORT AND RESISTANCE [2022]
One of the most common trading concepts used by day traders is support and resistance. It tells you where the supply and demand are, and this is the primary force that moves the market. Demand shows that people want to buy, and supply shows that people are willing to sell.
Main Points
- One of the most common trading concepts used by day traders is support and resistance.
- Support acts as a floor, meanwhile resistance acts as the price barrier from going higher.
- The reasons why price moves in the markets is because of supply and demand.
- They aren’t foolproof, these supply or demand zones could fail and do fail, and are also prone to liquidity hunts and market manipulation.
Introduction to Support and Resistance
Before we get into support and resistance, the reason why prices move in the markets is because of something psychological known supply and demand. As long as support is respected, that means buyers are agreeing that there is demand in that zone, and as long as resistance is respected, that means there are a lot of sellers agreeing to sell and there is supply.
When the demand is greater, it means there are more people willing to buy, so the price will go up. When the supply exceeds the demand, more people sell than buy, causing the price to fall.
Support and Demand Zone
Support levels or demand zones are levels where there is enough buying pressure or demand to keep prices from falling lower and may also act as the bottom at times.It can show traders’ willingness to buy, and demand can overwhelm supply, but this won’t always be the case. As you can see in the image above, once it broke the support zone, it violently went down, collected liquidity, and then went back up. This article won’t go in depth into smart money concepts, but it shows that you should never 100% trust any trading strategy or concept.
In the image below, you can see that USOIL on the monthly scale had a support and demand zone where each time it went to the bottom, it bounced and reversed back up due to the strong demand that was present in these zones. The last time it fell below the demand zone, it was only to collect liquidity and liquidations, possibly for the market makers to buy at discounts.
Resistance and Supply Zones
More information about support and resistances
Supports and resistances can also be determined with trendlines. Psychologically, support and resistance can be at any level where there is either strong buying demand keeping it from going lower or strong supply keeping it from going higher.
In the chart above, you can see how price acted as support each time it touched the trendline. Moving averages can also act as support or resistance, pivots, and VWAP and deviation bands, too.
You can find support or resistance on any timeframe and chart. even on low timeframes and weekly and monthly timeframes. A support or demand zone on the hourly chart, on the other hand, will have greater strength and significance than a support zone on the one- or five-minute timeframe.
The more times it respects the support or resistance zone, then the more strength and significance it’ll have. However, it is important to note that technical analysis isn’t an exact science. The financial markets have too many variables for prices to be predictable; the best we can do is make educated guesses, which is the unfortunate truth. It’s better to draw support ranges or boxes instead of a single line because the market is never truly horizontal. It can touch the support line, go a little below the line to get liquidity, and then bounce back up. Support and resistance zones are nothing special; you should always practice proper risk management because they are simply potential zones with buying or selling pressure that can be manipulated by banks or institutional traders to take liquidity.
Conclusion
Support and resistance zones are supply areas where there can be strong supply and demand. The more support or demand in a zone and the more significant it is, the higher the chance that it’s likely to bounce, and vice versa with resistance and supply zones: the more selling pressure, the more likely it is to reject that area.
These levels are critical key concepts and strategies used by many traders and are required for market success. They aren’t foolproof; these supply or demand zones could fail—and do fail—and are also prone to liquidity hunts and market manipulation. You should always follow risk management to have success in the market.
To learn more about risk management, click here
