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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Support & Resistance

Beginners Technical Analysis Series

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What is support and resistance?

The battle between the buyers (demand) and sellers (supply) is key price movement. In technical analysis, this creates what we see as resistance and support levels.

 Where the price of an instrument reaches a level where supply overtakes demand, a rise in price will hit a ceiling and begin to fall. A high in the price is left and resistance is created. 

 When an instrument sees demand become greater than supply, this creates a floor in the price and it will begin to rise. A low is created and support is formed.

As can be seen in the above illustration, the lows in price act as support, whilst the highs are resistance. Support are the levels at which traders are willing to buy, while resistances are thee levels at which traders are looking to sell. 

These support and resistance levels are important in terms of market psychology, and are the graphical illustration of supply and demand.

 In the illustration above, we see a break above resistance which then becomes a new level of support.  

Old support becomes new resistance, and vice versa

Once these levels have been broken, the supply and demand and the psychology behind the price movement are thought to have shifted. Subsequently, new levels of support and resistance will be established.  In this way, often once a resistance or support level is broken, its role becomes reversed.

 

If the price falls below a support level, that level will become a basis of resistance. If the price rises above a resistance level, it will become a basis of support. 

 

It is important to note that for a true reversal to occur, it is important that the price makes a strong move through either the support or resistance.

 

Often there can be a pullback to the break level, before continuing in the direction of the break..

 

 

Figure 2: Old support becomes new resistance and vice versa

Trading with Support and Resistance

There are three time horizons to classify trends. A trend of any direction can be classified as a long term trend, medium term trend or a short-term trend.

Traders and investors may have different time horizons for their outlook depending upon the market they are trading. A forex trader might consider a “long term” to be maybe six months. Whereas, an equities investor may consider a long term trend to be one to two years. Medium term trends trading forex, are probably around one to three months; whilst shorter term trends could be considered to last  a few days up to a few weeks.

The longer term (primary) trend can be composed of several medium term trends. Medium term (secondary) trends can therefore move with or against the direction of the primary trend. If the primary trend is an uptrend and there is a downward correction in price movement followed by a continuation of the uptrend, the correction is considered to be a medium term trend. Shorter term (tertiary) trends are contained in both medium and longer term trends

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