Friday, November 26, 2010

Buy the support and sell the resistance!

Support is the price level at which demand (buyers) is thought to be strong enough to stop the price from further decline. The logic behind this support is that the price declines toward support and gets cheaper, buyers become more interested to buy and sellers become less interested to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support.
1. The more times the old support/resistance levels are tested the more forceful it is if it is violated.
2. The volume on each test is very important because low volume on the test means price has no power to break the S/R line and if volume is high that’s means big buyer/seller are behind this force which has power to break the S/R.
After a support level has been broken, it often acts as a resistance level; this is because investors want to limit their losses and will sell later, when prices approach the former level.
Easy way to trace historical support or resistance is to look for V shape pattern in the chart. In the chart below we can see that price made several V shape patterns.

Resistance is the price level at which supply (sellers) is thought to be strong enough to stop the price from rising more. The reason behind this resistance is that the price advances towards resistance, sellers become more interested to sell and buyers become less interested to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance.
After a resistance level is penetrated, it often becomes a support level; this is because buyers who didn't buy at that price before it went up are now willing to buy at that price.
How can Support & Resistant Levels help you make profitable trading decisions?
1. Identification of key support and resistance levels is an essential part to successful and profitable trading. Being aware of the support and resistant levels of stocks and indices or forex can greatly boost analysis and forecasting abilities.
2. If a security is approaching an important support level, it can serve as an alert to be extra watchful in looking for signs of increased buying pressure and a potential reversal. If a security is approaching a resistance level, it can act as an alert to look for signs of increased selling pressure and potential reversal.
3. If a support or resistance level is broken, it signals that the relationship between supply and demand has changed. A resistance breakout signals that demand (bulls) has gained the upper hand and a support break signals that supply (bears) has won the battle.

1 comment:

alitergalen said...

Fundamental Analysis is essential to your trading success as it helps you to assess how economic and political indicators affect the market.