As we have determined in the previous articles, what we are basically looking at when we see an uptrend on the chart is a period of time when demand has continuously increased in relation to supply.

Again, conversely, what we are looking at when we see a downtrend on the chart is a period of time when the demand has continuously decreased in relation to supply. What support and resistance is all about is when the price levels at which demand and supply equations reverses itself and prices are expected to stop moving in the direction that it was moving before and potentially reverse itself.

Support is defined as the price level of a particular asset where there is enough demand should the price reach that level to keep prices from falling further. Resistance on the other hand is the price level of a particular instrument where there is not enough demand should the price reach that level to keep prices from rising further.

Here is an example of an excerpt of a price chart of a certain asset where support levels is shown as the black line where reversals have happened from a downtrend to an uptrend. From the figure, we can see that the price has touched that level several times, three times to be exact, and then it has never touched it again.

A support level that is held is what it is called. The same example shows a black line, this time showing the resistance level of the price of the asset, where reversals have happened from an uptrend to a downtrend.

The price has touched the resistance line three times, enough to establish a resistance line. You will also notice that the third reversal from a downtrend to an uptrend was not held by the resistance line during this period, as seen by the price level breaking through the resistance line and continuing to trend upwards.

Support and resistance lines do not necessarily have to horizontal. As we have learned about trends in the previous articles, trendlines can actually be support or resistance lines denoting the trend in the market. While horizontal support or resistance lines denote range-bound markets, or where markets are showing constant reversals, these lines also show trends.

Therefore, the black arrow in the excerpt shown above is actually a support line in the uptrend. Here is another example from the same chart. Here we see an uptrend where the price touches the support line several time before eventually breaking down to a downtrend lower than the support line.

Support points are the lowest points reached before each recovery of the binary option asset upward. Conversely, a resistance line can be shown as such. In the figure above, a resistance line is drawn from the same excerpt showing the price touching the resistance line several times. This line is acting as a resistance to the uptrend. We can think of it as a boundary of the price preventing it from rising even more. To define the resistance points, just take the highest point reached just before the price begins to drop.

Each upward peak represents a resistance point. A common strategy that binary options traders use is to know when to choose call or put options based on the resistance lines. Generally, put options are purchased when a price tends to touch a resistance line where reversals from uptrends to downtrends are imminent, and call options are chosen when a price tends to touch a support line where reversals from downtrends to uptrends can easily happen.

It is necessary to be aware of where these lines fall in higher time frames than what you are trading in order to avoid false signals. For example, a resistance line drawn from a chart of weekly prices will likely provide enough resistance to negate a signal taken from a chart of daily or hourly prices. You can avoid this by drawing lines on weekly charts in one color, daily in another and hourly in another.

This way you can tell which lines are more or less likely to affect your trades once prices action reaches them. Long Lasting — Support and resistance lines are one of the longest lasting technical indicators and signal generators I know. Once drawn, these lines can provide target areas where signals can be found far into the future.

Lines I have draw during reversals, continuations and break outs years in the past without fail affect price action in the future whenever price action returns to that level. This is an example of the underlying idea behind why support and resistance lines work.

These lines mark price levels where buying or selling was heavy, or reversed, or consolidated. Once price action move on from this point the market is left split between losers and winners. Look at the chart below. A support level established in affected prices 4 and 10 years in the future. Gaps And Windows — Gaps in price action, otherwise known as windows, are places on the chart where price action moves so rapidly as to create a gap between one day, or one candle, and the next.

This can be caused by good or bad news of a wide variety but regardless of the cause, presents the same opportunities for trades. First, gaps and windows provide strong support and resistance. This is usually because the market moved so fast that many traders were left out. As prices retrace back to the gap level those traders who were left out of the move will scramble to get into the next one. In the case of an uptrend and up gap, the upper sill will provide support but if broken, the lower sill becomes the target.

The same is true in reverse for down trends. I should also note here that most gaps will eventually close, that is, once price gaps up, sooner or later it will retrace all the way to the original price level. Fibonacci Retracements — Fibonacci Retracements are a great tool for finding support and resistance levels but also for confirming a support or resistance level.

Reflexive Theory Of Support And Resistance — It is well known that support and resistance lines that have been broken will reverse in nature.

Below we look at what support and resistance are , and the major forms they can take, such as Horizontal, Diagonal, Historic and Predictive. Support, or Support Level, is a price at which buyers tend to enter an asset stock, currency, future, commodity, etc.

If a stock, for example, is falling and buyers enter the stock repeatedly near a similar price, pushing it higher, this would be a support level. In essence, support is like a floor, supporting the price. If the price drops below a support level, then support is broken.

Resistance, or Resistance Level, is a price at which sellers tend to enter an asset. Resistance is like a ceiling, resisting a rise in price. If the price rises above a resistance level, then resistance is broken. Most commonly discussed is horizontal support and resistance. A horizontal is a specific price, or a price area, which has supported or resisted price movement beyond it. Figure 1 shows an example of horizontal support and resistance.

The price moves higher and stops near 1. This is confirmed a couple days later. Support kicks in near the 1. Eventually the price rallies and breaks through the resistance area. As a very basic guideline, when the price moves through resistance it is a positive sign as it shows the price is making headway higher. When the prices moves through support it is a negative as it shows the price is progressing lower. For more on breakouts see Improving the Odds When Trading Intra-Day Breakouts.

If an asset breaks though support or resistance, but then shortly after crosses back through it in the opposite direction, this is a warning sign the breakout was false, and is called a false breakout.

The most common form of diagonal support or resistance is created by a trendline. A line is drawn between a price low and a higher price low, or a price high and a lower price high, and then the line is extended out to the right to create a trendline.

In this case it is not a specific price that brings in buyers or sellers, but rather the dynamics of the trend. If the diagonal is upward, the trend on that time frame is up. When the diagonal is down, the trend is down.

It is important note though that there may different trends occurring on different time frames. As a general guideline, when the asset price bounces up off the trendline this is positive. It breaks below the trendline it is a warning signal of potentially further weakness.

For more on this topic, see Beginners Trading Concepts: Using Trendlines Effectively. When traders refer to support or resistance, typically they are referring to historic price action to determine the level. We are looking to the past to see where price has struggled to rise above, or fall below, a certain threshold.

These levels can help to determine entry or exit points or can used to create strategies. The trendline though also has a predictive property, since it can be extended out to the right and therefore provides a rough estimate of where the trend may go in the future.

Traders also use other tools to determine where future support or resistance may develop. Such tools include Elliott Wave analysis, which uses wave patterns to determine where a price is within its overall trend.

This information can then be used determine when the trend may reverse or continue on its course. Fibonacci retracements are another common tool. These tools are beyond the scope of this article, but if you are interested, researching and understanding these tools and trading concepts can add another element to your trading. Use support and resistance to determine strength or weakness; if an asset is dropping through support levels, it is weak.

If it is rising through resistance levels it is strong. Before trading always have a game plan: Creating a Trading Plan. Support Support, or Support Level, is a price at which buyers tend to enter an asset stock, currency, future, commodity, etc. Figure 1. Figure 2. Historic When traders refer to support or resistance, typically they are referring to historic price action to determine the level.

Learn more from us. A stop is vital because the price of the asset is not always inside a defined range. Risk warning: Your capital can be at risk. Time Frame — Time frame is an important aspect of support and resistance. The matter will be getting a bit more complicated the more we progress in our study of the fine art of technical analysis and trading as a whole, but fear not because we will do everything in our power to make sure that everything is explained properly and without any questions left unanswered.

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