The majority of traders of any experience knows about the price’s moving direction. If it reaches the support line, it rises in a price, and when the price is near the resistance line, it runs back. Such principle for the price activity can be seen within a range. Actually, it is connected with the range definition itself – price moving within an enclosed area on the graph. Because of that a lot of traders use range trading as the main approach. Moreover, it is included in many systems, which helps to gain more money, concentrating on the support and resistance.
Unfortunately, everything is not as good as it is expected. It is very hard to recognize when the price will be out of sideways range movement, and also nobody can predict it because the amounts are not available.
Support (can be also called “bottom” or “trough”) is a moment when supply is overcome by demand right below the price. Explaining this in other words, in this situation the pressure to sell is less then to buy and prices become higher.
After the prices have become higher, the direction changes upward because the downward has stopped.
It is the opposite of support when demand is overcome by supply right above the price. Explaining in other words, resistance (or it can be called “top” or “peak”) is a situation when prices become lower because the willing to buy is less than to sell.
That is why when prices are at this level, the direction changes from upward to downward.
An uptrend is a sequence of higher tops and higher troughs, they form this pattern. Uptrend shows a situation when supply is dominated by demand, which is difficult for the resistance levels, they just can not carry it. As a result, the tops of prices which go through resistance levels are registered on the chart.
A downtrend is a sequence of lower tops and lower troughs, they form this pattern. Downtrend shows a situation when demand is dominated by supply, which is difficult for the support levels, they just can not carry it. As a result, the lows of prices which go through support levels are registered on the chart.
Uptrend Lines Definition
First of all, let’s understand what an upward price movement is. This is a line which shows the position of bouncing up prices. So, the uptrend line is needed for support during this movement. The pressure to sell is less than to buy and prices are pushed to be higher, as with support.
Downtrend Lines Definition
First of all, let’s understand what a downward price movement is. This is a line which shows the position of prices which are pushed back down. So, the downtrend line is needed for resistance during this movement. The pressure to buy is less than to sell and prices are pushed to be lower, as with resistance.
The Moving Average Mission
There is one more pattern which is based on support and resistance. Traders use moving average if they are not sure of support and resistance levels showed with straight lines. This pattern looks like curved trend lines.
When the pressure of supply is lower than demand it is indicated as the price moving from the moving averages higher. In this situation, there is an upswing and higher highs are shown. And if the pressure to sell is less than to buy, the price retreats and finds support by the moving average.
When the pressure of demand is lower than supply it is indicated as the price moving from the moving averages lower. In this situation, there is a downswing and lower lows are shown. And if the pressure to buy is less than to sell, the price bounces back up and finds resistance by the moving average.
The Right Way to Trade Support
It is very logical that a lot of pro traders pay attention to support and resistance levels. Why? Because it is normal to react on prices bouncing upward from the support line and to buy.
A trader can find different signals to prove his intentions, usually, they look at a bullish pattern. For example, triple and double bottom, inverse head and shoulders.
One more signal is a spotted bullish candlestick formation. For example, a hammer.
The Right Way to Trade Resistance
Because it is normal to react on prices tend to pull downward from the resistance line and to sell.
A trader can find different signals to prove his intentions, usually, they look at different shapes and sizes. For example, triple and double top, head and shoulders.
One more signal for selling is a spotted bearish candlestick formation. For example, a shooting star.
Swing Trading Definition
There is a price movement which can be seen during downtrends the same as an uptrend. It can be defined as a cracking the support line and breaking through resistance which price action can make. It is an opposite direction of the usual tendency moving.
Traders buy when the price action breaking through the resistance line and when a downtrend finishes its moving and the forming of an uptrend starts. This is traders’ behavior during an upward trend.
But if a downtrend occurs the situation is opposite. Traders sell when the support line is gone beyond by the price action and when an uptrend finishes its moving and the forming of a downtrend starts.
To Sum Up
When the situation is predictable, traders will look at support and resistance levels in the chart limited area.
The most popular reaction is to buy when the price is moving up from support and to sell when it is moving down from resistance. It is said that there is a big risk selling and buying looking at support and resistance, but if the situation is predictable, you can get easy income.
Selling at the resistance level and buying at the support one should be proved, there should be a technical reason for this.
A trend-following chance to buy occurs when during an upward movement resistance does not hold up and the prices constantly break through resistance levels.
A trend-following chance to sell occurs when during a downward movement support does not hold up and the prices constantly break through support levels.
So, no matter what people say, looking at resistance and support levels can give traders good opportunities but they should be confident and have some proofs. Trade wisely!