The most important element of technical analysis is price. The simplest and , the most effective analysis tool are support and resistance, provided that it is determined correctly. In today's lesson we will learn the secrets of this very effective element, which we can later use when analyzing the instrument that interests us.
Support - this is an area or level where the activity of buyers is greater than sellers, which stops the decline. ! [Text] (http://cms.trqpro.pl/uploads/10b93a38351a42a28bc2288f2f188922.jpg) The emotions of investors are the basis of these zones. Satisfaction and profit taking, fear of declines, disbelief in reaching subsequent peaks - ever higher prices are resistance. However, the belief that it is already cheap and cheaper can probably not be, we define as the level of support. In the upward trend, the resistance inhibits the price increase, and in the downward support for some time, they inhibit the decrease.
The level of support is determined by previous price minima during price discounts, i.e. earlier days. We can also mark them with trend lines, round numbers or Fibo abolitions (about this in the next lessons). Let's stop for a moment at the zones of round numbers. This is important because all these round numbers, i.e. 1000, 2000, 10,000 etc. - are psychological points of resistance or support, where mass selling or shopping is often carried out. Below is an example of support:
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We see how the price has found its "support" at the level of $ 109. This zone was a place where demand increased. We note that the support line has been tested several times, i.e. it was an important buy level for investors. Later it was finally broken, which is information for us that this line will create future resistance. So, when the price is again approaching the price of $ 109, it will be very possible to react at this point (increase in supply).
In the chart above, we can see how important psychologically $ 1,000 was for investors. The resistance line which this round number set out later turned out to be also significant support.
Here, the blue arrows marked the places where the price was stopping, which meant that this was an important resistance line, while the yellow ones served as the same support. So the conclusion is simple, puncture support becomes resistance, and analogously puncture resistance becomes support. The more price reaction in these resistance or support zones, the more important these levels will be in the future.
As we have already visualized the lines of support and resistance, let's take a moment to consider the concept of credibility of support and resistance. This is how Brian Green described it: "The longer the trend line is and the more points used to determine it, the greater its importance. A significant violation of a trend line usually means its reversal or at least a reduction in its pace. " To put it simply - the strength of the support or resistance area depends on the time the price / prices are in a given area, the volume of turnover made in this area, the distance at which the price has moved away from this level and the time since the formation of this level.
When is the breakthrough resistance / support line broken??
When the breakout is confirmed by increased volume and the candle body has closed above / below this line. It's best to wait for the next candle that will give us a picture of whether we have broken over the support / resistance line. We often deal with false breakouts above the above mentioned lines, which are preceded by a lower volume and it is a kind of trap where experienced investors want to cause panic or euphoria in "fresh" people on the market. Below is an example of such a false breakout, where eventually this attempt failed, and supply prevailed over demand. The blue arrow marks the shrinking volume - this is also another argument confirming the weakness of demand.
Here, however, let's get acquainted with the example of the price breaking by the resistance line. As you can see, the price first tested the line several times, bouncing off it unsuccessfully to finally break it and close above the resistance zone. Another candle confirmed it, as did the growing volume.
We must also remember that basically, there is no such thing as "strong" support or resistance. All we see is a struggle between buyers and sellers - who has more capital to guide the course towards themselves. The market is ruthless and here the proverbial one phone really is enough to change everything on it.
An important issue is also the trend in which the support and resistance lines are tested. If in the upward trend, then we can see that investors test demand, realize their profits or buy before buying. If in a probate, investors collect orders for a short game (or bet that the rate will fall below) or reduce losses - reselling part of this instrument at a given level, in order to average the loss that resulted from buying it too expensive.
Now that we have familiarized ourselves with the concepts of "resistance" and "support" and are able to determine it, the chart will become more transparent for us and we will be able to make a more precise decision to buy or sell a given instrument.