DavidWaring

Support and Resistance

In our last lesson we looked at the basics of stock, futures, and forex charts. In this lesson we are going to look at something which is known as support and resistance and what these levels tell us about potential future market moves.

As many of you already know, just as anything where market forces are at play, the price of a financial instrument in the stock, futures or forex markets is ultimately determined by supply and demand. Very simply, if demand is increasing in relation to supply then price will rise, and if demand is decreasing in relation to supply then price will fall.

As we have learned in previous lessons, what you are basically looking at when you see an uptrend on a chart is an extended period of time where demand has continued to increase in relation to supply. Similarly when looking at a downtrend you are seeing an extended period of time where demand has decreased in relation to supply for an extended period of time, causing price to fall. Similarly, in a downtrend, demand is continuously falling in relation to supply which causes the price to fall.

In this lesson we are going to look at something known as support and resistance which are price levels where the supply demand equation is expected to change, and price is then expected to stop moving in the direction it was moving previously, or reverse direction.

Support

Support is the price level of a particular instrument in the stock, futures, or forex market where there are enough demand should price reach that level to keep the price from declining further.

Resistance

The opposite from support is resistance which is the price level of a particular instrument where there is not enough demand should price reach that level for prices to continue to rise.

Chart Showing Support and Resistance in a Range Market



There are many ways to try and determine support and resistance however the most basic way is looking for areas on the chart where the price has touched multiple times (as in the above examples) without breaking through that level. The more times that price has touched a support or resistance without breaking through it the more “valid” that level is thought to be.

A very basic strategy that some traders use is to look for areas of support and resistance and sell as price approaches resistance anticipating a decrease in price and to buy as price approaches support anticipating an increase in price. Support and resistance levels can also be used as take profit targets a concept which we will explore in later lessons.

This is easiest to see in markets which are trading sideways as in the chart above. You can however also spot support and resistance in trends as the trend line and potential trend channel which are drawn to analyze the trend are acting as support and resistance in exactly the same way as they do above.

Chart Showing Support and Resistance in a Trending Market




You should now have a good understanding of the basics of support and resistance. In the next lesson we will look at something called multi time frame analysis and how you can use this to determine which levels may be good areas to look for potential trading opportunities and which are not.

As always if you have any questions or comments please feel free to leave them in the comments section below, and have a great day!

bolhoso

It worths reading the chapter 19 of Alexander Elder's book Trading for a Living: he talks a lot about support and resistance, the psycological factors that create them and some tatics for trading them.

Another great reading is these two investopedia.com articles:
1) Support & Resistance basics: Support & Resistance Basics
2) Support and resistance reversals Support And Resistance Reversals

The second one is curious, because he shows how support can turn into resistance and vice-versa.

Have a great reading!

Lucas.

forexer

Hi David,

Question1) how should the support and resistance lines be plotted? On points of close prices or highs/lows?

Question2) how can trend lines be plotted?

Hope to hear from you soon...

David Waring

Hi Forexer,

Glad to hear from you.

As for trendlines have a look at the below link:

http://www.informedtrades.com/226967...tml#post233061

As for whether to use the high/low or the close when drawing support and resistance the answer to this is some traders use the close and some traders use the high and the low. For more on this have a look at the below link:

Candlesticks and trendlines..

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

MajorDisaster

Hi David, following your link to further links offering more insight into trenlines, I arrived at this page: Incredible Charts: Trendlines

where, under the paragraph heading of "Support and Resistance" that: [COLOR="red]Trendlines do not predict levels of support and resistance. Support and resistance run horizontally; not at an angle[/color]

but your secong chart clearly shows an upward trend with lines marked "support" and "resistance". What am I missing here?

David Waring

Hey Major,

Good to hear from you.

I think most traders would agree that trendlines just as things such as moving averages which do not run horizontally can and do act as support and resistance in the market.

With this in mind I am not sure why Incredible charts said that as generally I have found that to be a pretty good site as far as technical analysis goes.

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Tekmnd

Hi Major

"Trendlines do not predict levels of support and resistance. Support and resistance run horizontally; not at an angle"

I would add that, in my opinion, the examples the site gives just below that statement clearly show support or resistance being established by a trendline.

Cheers
Tek

forexer

Hi everyone,

How should i draw a support and resistance line? Both lines need at least two points to form right? A higher support can also act as a later resistance after the retracement and a resistance can also act as a later support after price rises. Am i right?

Tekmnd

Hi forexer,
What you are really looking for are a bunch of spots where the price changed direction at the same spot.

For horizontal support and resistance, look for a bunch of spots (2 or more, but the more the better) where the price reversed direction at the same price.

For a slanted resistance (which the web site claims doesn't exist), look for where the price changed direction in several spots that have the same slope. In other words, where you could place a ruler up to several spots where the price reversed direction and draw a straight line.

Cheers
Tek

forexer

Hey tek,

thanks for the replies, but are there really slanted support and resistance lines? My instructer said they only exist with no gradient.