What is support and resistance? When participating in the stock market, understanding and applying key terminology is extremely important for effective analysis. Among them, support and resistance zones are two undeniably important concepts. They directly affect investors’ trading decisions. Thus, it is important to clearly understand the two zones and how to define them. Let’s find out about Forex Trading through the following article!
What is the concept of support and resistance?
There are many theories regarding what is support and resistance. And what’s a hedge fund? A Hedge Fund is called a hedge fund or risk insurance fund. This is a term that refers to investments managed by professional fund managers.
The way calculate break-even point is also very simple. Break-even point = Total fixed costs / (Product A net profit ratio + Product B net profit ratio). Here are some other theories you should understand.
What is support and resistance?
In investing, these regions play an important role and are favored by experienced investors. And they are often used to make trading decisions. Also known as price limits that have appeared in the past. Support and resistance zones are where stock prices often struggle or change direction before continuing in a new trend (up/down).
According to technical analysis, the recurrence of these zones will create a similar psychology in investors’ minds. These two areas usually correspond to the exchange price and ceiling price of the stock.
Concept of the support zone
Support refers to the price level where a downtrend is expected to reverse to increase or decrease in speed. Investors’ psychology is often to buy stocks when the price is determined at the support zone.
Concept of the resistance zone
Resistance is where the stock price usually tends to face an increase. And there are signs of reversing to slow down, turn around, or slow down. Investors’ psychology is often to sell stocks if the price is determined in the resistance area.
Compare different points of support and resistance zones
The difference between these two regions lies in the main price threshold. Typically, the support zone will be at the bottom of the chart, while the resistance zone will be at the top. In case the support and resistance levels are crossed, the price zones will change: the support zone becomes resistance and vice versa.
When the market is in an uptrend, both resistance and support will increase. Conversely, in a bearish market, these two thresholds will decrease. From these observations, investors can quickly recognize and evaluate fluctuation trends.
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What does support and resistance mean?
These are two important areas that represent limits in the stock market. They are used by many investors for analysis and directly influence their trading decisions.
- Those are the blocking points for participants’ trading psychology where they make buying/selling decisions after consideration.
- That is the foundation that investors rely on to decide to exit a position. To effectively place stop loss or stop loss orders. In fact, many investors want to preserve capital by following the stop-loss principle when trading within limited zones.
- Assist investors in determining the right time and price to buy or sell, to maximize profits. Experts use these two zones to predict the direction of future price movements. From there, make more effective buying/selling trading decisions.
How to identify support and resistance
So you already know the outline of support and resistance. The next thing you should explore is how to define these two regions. Below are some possible ways.
Support and resistance is an area
These two zones are not simply a specific price level but are often defined as a price range. You can use candle shadows to locate support or resistance areas easily.
At the top, the support area is defined as the distance between the highest price and the opening/closing price of the candle. If there are many candles creating a resistance area, then that area is considered strong resistance. And the price is often difficult to break through this zone.
At the bottom, the resistance zone is the distance between the lowest price and the opening/closing price of the candle. If there are many candles creating a support zone, then that zone is considered strong, and the price is usually unlikely to fall through this zone.
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What is the use of trend lines in support and resistance?
Support and resistance zones are basic concepts in technical analysis. Helps stock investors determine the appropriate price range to buy or sell. However, the price of stocks often changes up or down.
Connecting price peaks over a period of time creates a trend or resistance line where selling pressure will increase as the price approaches the trendline.
Conversely, in an uptrend, connecting price bottoms creates an uptrend or support line. When the price reaches the support line, buying pressure will increase, leading to the possibility of a reversal and rebound.
Use line analysis
To identify short-term support and resistance points, we can use price-moving averages. Moving averages have the ability to smooth out noisy price signals in the short term. Create resistance points when the price is below the moving average. And the support point is when the price is above the average line.
When the price crosses the 20-day moving average, the moving average becomes a support point. When the price continues to increase and touches the average price line, buying pressure will increase due to profit-taking, from which prices may return to an uptrend.
Conversely, when the price is below the 20-day moving average, the moving average will become a resistance point. When the price continues to decrease and approaches the average price line. Selling pressure will increase, leading to the possibility of prices returning to a downtrend.
Other ways to identify support and resistance
You can take advantage of round prices such as 0.5 USD/share or 1 USD/share to determine the levels of these two zones. Because round price levels are often psychological points where investors feel the stock value is reasonable.
In addition, the “golden ratio” Fibonacci number sequence can also be used to determine support and resistance levels. The scores in the Fibonacci sequence can be considered support levels when the price crosses them. On the contrary, become resistant when the price is below them.
Conclude
Understanding what is support and resistance, along with understanding price fluctuation trends, is an important factor in making accurate trading decisions. Hopefully, this information will help you apply it effectively in your trading activities and achieve the profits you expect. To get more useful information, let’s follow Forex Trading!
FAQs
How can identifying support and resistance help?
Identifying future support levels can improve the profitability of your trading strategy. Or short-term investing by providing an indication of where the price may stop. Seeing a resistance level in advance is also beneficial. Because of the warning traders must be alert when the price approaches this area to be able to react in price. Although the methods vary, the common goal is to look for signs that the price may react. When it approaches or touches a recognized price level.
How can market sentiment affect support and resistance levels?
Market sentiment and financial behavior may influence the positions of the two regions. When these levels become problematic, traders can adjust their strategies.
What happens if the price breaks its support or resistance?
A break from support or a reversal can indicate a change in trend direction. When the support level is broken, it can become a new resistance level.
