subject: Learn Support And Resistance Trading! [print this page] Markets never restMarkets never rest. All the time there is something happenging in the market. Market are always moving up, down or sideways. A trend is formed when the price of a stock, currency pair or for that matter any security starts to go high and high or low and low in a steady fashion. It doesn't mean it will go up or down in a straight line. Markets don't move in a straight line. But most of the time, the market moves horizontally still up and dwon but with no trend.
Support and resistance concepts are the most simplest and easiest to identify with indicators and master on charts. Support and resistance trading is also profitable. These two levels are established in the market in response to the balance of supply and demand of a particular stock, currency pair or for that matter any security.
Markets are just people buying and selling. Think about the grain market a few centuries back. People standing in the middle of the market place and an auction taking place. The same happens in the stock market, currency market or for that matter any other market. There is an offer rate and their is a bid rate. When both match, the buy and sell takes place. In every transaction, there is a buyer on one side and a seller on the other side. So markets are just crowds. Whatever the crowd does, market only reflects that. So ultimately it is the crowd behavior that you see reflected in the price action. Just like the grain auctions of centuries ago, today too, buyers and sellers have certain price levels that they have in their minds around which they are going to buy or sell. When the price action reaches the price where the crowd things that it is an attractively buy, buying starts and price stops falling and starts climbing again. Once again when it reaches a level where the crowd thinks that it is now over priced, selling starts and prices start to fall again. So this back and forth price action continues till the underlying fundamentals in the market change. When the fundamentals change, new support and resistance levels are established. Now support level is the price around which the crowd thinks the stock, currency pair or the security are attractively priced and it is a good buy. So they buy as a whole around the support level.
Similarly there is a price level where the crowd thinks that the stock, currency pair or security is ovepriced. So when price action reaches that level, the crowd starts selling at that level. This level is known as Resistance level. Price bounces back at this level. If it is able to penetrate that level, it is known as a breakout and indicates that the market is changing its direction to a new direction.
So, resistance is the level at which the market becomes overbought and support is the level at which the market is oversold. How do you find the market overbought and oversold? You can use the Relative Strength Index (RSI) to know when the market is overbought and oversold. These overbought and oversold levels are just a reflection of the crowd mentalility.
The price action continues between the two levels. Support and resistance levels are significant forces in the market. They represent price levels where the crowd makes financial decisions about profit and loss.
Now, support and resistance levels are a fundamental concept that traders use to trade any market. No matter what market you trade, you will comes accross the support and resistance level. Trade stocks, forex, futures, options, commodities or ETFs, you will find these levels.
Support and resistance trading is also known as range trading. The price differential between the support and resistance is known as the range. Calculating daily ranges is an important thing for many day traders. It is essential for you to understand the concept of support and resistance as these two levels are used extensively by traders.
by: Ahmad Hassam
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