What is Support and Resistance?If you have ever looked at a chart or made a trade then you have most likely heard of support and resistance, but everyone has their own approach to identifying and trading it.
What is it?
Support is an area where there is a surplus of buyers. When price enters this area the buying pressure is stronger and price increases.
Resistance is an area where there is a surplus of sellers. When price enters this area the selling pressure is stronger and price falls.
How is support and resistance formed?
As price moves up buying pressure will gradually decrease until the selling pressure becomes the dominant force. When this happens, the area become resistance .
When the selling pressure is stronger than the buying pressure the price will start to retrace (also known as a pullback). Price will continue to retrace until buying pressure becomes the dominant force again. When this happens, the area becomes support .
How to plot support and resistance
You’ll often see support and resistance plotted as a single thin line on the previous low or high. It is important to remember that support and resistance are areas not exact numbers. Buy and sell orders will be scattered throughout the area, not just on the exact high or low, so we should draw our support and resistance as an area, not a single line.
How to trade support and resistance
Trade the bounce
Buy when price bounces on support
Sell when price bounces off resistance
Trade the break
Buy when price pushes through resistance
Sell when price falls through support
Important things to remember
When price breaks through an area of resistance, that area has potential to turn into support. Likewise, when price breaks through an area of support, the area has potential to turn into resistance.
Price will often revisit an area of support or resistance multiple times. The more times this happens, the weaker the area becomes and the more likely price is to break through. This happens because every time price visits that area the orders are absorbed, and the next time it visits the area there are fewer orders. Fewer orders make the area easier to break through.
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Happy trading!
