One of the most frequent techniques in chart analysis used by professional traders is support and resistance levels. They are a common way of chart analysis of price behavior. Now you’ll understand what the levels are and how important they are, how to draw them and use them when opening deals. We will give you 3 ways to use support and resistance levels to make better trades.
What are support and resistance levels
Support and resistance levels are key price clusters where buyers compete with sellers.
A support level is a price point where demand is strong enough to stop further declines in the value of an asset. Logically, as the price decreases towards the support level, the number of buyers increases and the number of sellers decreases (the volume of buying increases and the volume of selling decreases).
This is the opposite of support levels. These marks appear when the supply becomes equal to the demand. The logic here is that as you approach the resistance level, the volumes of buyers are decreasing, while the volumes of sellers are gradually increasing. At the point where the balance is reached, the price will stop and stop further growth.
Trading by Support and Resistance Levels
- Rebound from levels. This is a classic variant of trading using levels. The idea is that the price will bounce from the nearest trend support.
- Breaking through the level. One more widespread strategy, which is often used by short-term traders and scalpers. The idea is that when a strong resistance level is broken, the price will make an impulse.
- False breakout. Another very popular strategy is false breakout trading. The idea is that if the level has been broken unsuccessfully, the price will make a strong impulse in the opposite direction.
The influence of levels on the market
The level on the chart is not just a drawing. We have considered the technical side and the construction of support and resistance lines, but there is more than that behind them, because they influence the market. There are a few facts to note in this regard:
- Levels are always supported by transaction volume, which means maximum concentration of liquidity and big money in these areas.
- Large market participants can form levels, hold them and defend positions.
- Breakout or rebound of a level is an indicator of which participant won (buyer or seller).
- Levels also influence the market psychologically, especially at round numbers (multiples of 100, 500, 1000).