Support and resistance is one of the most used concepts in trading. It is curious, that everybody seems to have their own idea of how to determine support and resistance. Let’s see it with an example:
As you can see in the picture above, this zigzag pattern is making an upward move (bull market).
When the market moves up and then makes a pull back (correction), the highest point reached before it makes a pull back (correction) is now resistance. As the market continues to move up, the lowest point reached, before it starts to move up, is called support. In this way support and resistance are continually forming as the market elapses during trading time. Of course, as any downtrend is never perpetual it will rise at some point to an uptrend.
Candlestick Chart Representation of Support and Resistance
One thing to keep in mind is that support and resistance levels are not exact figures. Many times you will see a support or resistance level that appears to be broken, but later you discover that the market was testing it. With candlestick charts, these support and resistance “levels” are usually represented by the shadows of the candlesticks.
Look at how the candlestick shadows tested the 1.2500 resistance level. At that time it looked like the market was breaking through resistance. However, after the fact we can see that the market was simply testing that level.
When you plot support and resistance, you don’t want to be influenced by the emotional reactions of the market. You want to plot the actual movements of the market.
When you look at the line chart, you plot the support and resistance lines around the areas where you can see the price forming various peaks or valleys.
Another interesting tip about support and resistance:
- When the market breaks through resistance, that resistance now becomes
support. - The more times prices test a resistance or support level without breaking it, the stronger it will be.
without breaking it, the stronger the support or resistance zone will be.
Sounds interesting, doesn’t it? Keep learning with DTB with the next articles in our Blog.