Support and resistance

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In stock market technical analysis, support and resistance are certain predetermined levels of the price of a security at which it is thought that the price will tend to stop and reverse. [1] These levels are denoted by multiple touches of price without a breakthrough of the level.

Contents

Support versus resistance

A support level is a level where the price tends to find support as it falls due to an increase in demand for the asset. This means that the price is more likely to "bounce" off this level rather than break through it. However, once the price has breached this level, by an amount exceeding some noise, it is likely to continue falling until meeting another support level. [2]

A resistance level is the opposite of a support level. It is where the price tends to find resistance as it rises due to an increase in selling interest. Again, this means that the price is more likely to "bounce" off this level rather than break through it. However, once the price has breached this level, by an amount exceeding some noise, it is likely to continue rising until meeting another resistance level.

Traders use support and resistance levels in different chart patterns. [3]

Reactive versus proactive support and resistance

Proactive support and resistance methods are "predictive" in that they often outline areas where price has not actually been. [4] They are based upon current price action that, through analysis, has been shown to be predictive of future price action. [5] Proactive support and resistance methods include Measured Moves, Swing Ratio Projection/Confluence (Static (Square of Nine), Dynamic (Fibonacci)), Calculated Pivots, Volatility Based, Trendlines and Moving averages, VWAP, Market Profile (VAH, VAL and POC). [4]

Reactive support and resistance are the opposite: they are formed directly as a result of price action or volume behaviour. They include Volume Profile, Price Swing lows/highs, Initial Balance, Open Gaps, certain Candle Patterns (e.g. Engulfing, Tweezers) and OHLC. [4]

A price histogram is useful in showing at what price a market has spent more relative time. Psychological levels near round numbers often serve as support and resistance. [4]

Identifying support and resistance levels

Support and resistance levels can be identified by trend lines (technical analysis). [6] Some traders believe in using pivot point calculations. [7]

The more often a support/resistance level is "tested" (touched and bounced off by price), the more significance is given to that specific level. [8]

If a price breaks past a support level, that support level often becomes a new resistance level. The opposite is true as well; if price breaks a resistance level, it will often find support at that level in the future. [9]

Psychological Support and Resistance levels form an important part of a trader's technical analysis. [10] As price reaches a value ending in 50 (ex. 1.2050) or 00 (ex. 1.3000), people often see these levels as a strong potential for interruption in the current movement. The price may hit the line and reverse, it could hover around the level as Bulls and Bears fought for supremacy, or it may punch straight through. A trader should always exercise caution when approaching 00 levels in general, and 50 levels if it has previously acted as Support or Resistance.

See also

Related Research Articles

In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. As a type of active management, it stands in contradiction to much of modern portfolio theory. The efficacy of technical analysis is disputed by the efficient-market hypothesis, which states that stock market prices are essentially unpredictable, and research on whether technical analysis offers any benefit has produced mixed results. It is distinguished from fundamental analysis, which considers a company's financial statements, health, and the overall state of the market and economy.

<span class="mw-page-title-main">Day trading</span> Buying and selling financial instruments within the same trading day

Day trading is a form of speculation in securities in which a trader buys and sells a financial instrument within the same trading day, so that all positions are closed before the market closes for the trading day to avoid unmanageable risks and negative price gaps between one day's close and the next day's price at the open. Traders who trade in this capacity are generally classified as speculators. Day trading contrasts with the long-term trades underlying buy-and-hold and value investing strategies. Day trading may require fast trade execution, sometimes as fast as milli-seconds in scalping, therefore direct-access day trading software is often needed.

The Elliott wave principle, or Elliott wave theory, is a form of technical analysis that financial traders use to analyze financial market cycles and forecast market trends by identifying extremes in investor psychology and price levels, such as highs and lows, by looking for patterns in prices. Ralph Nelson Elliott (1871–1948), an American accountant, developed a model for the underlying social principles of financial markets by studying their price movements, and developed a set of analytical tools in the 1930s. He proposed that market prices unfold in specific patterns, which practitioners today call Elliott waves, or simply waves. Elliott published his theory of market behavior in the book The Wave Principle in 1938, summarized it in a series of articles in Financial World magazine in 1939, and covered it most comprehensively in his final major work Nature's Laws: The Secret of the Universe in 1946. Elliott stated that "because man is subject to rhythmical procedure, calculations having to do with his activities can be projected far into the future with a justification and certainty heretofore unattainable".

<span class="mw-page-title-main">Dead cat bounce</span> Small, brief recovery in the price of a declining stock

In finance, a dead cat bounce is a small, brief recovery in the price of a declining stock. Derived from the idea that "even a dead cat will bounce if it falls from a great height", the phrase is also popularly applied to any case where a subject experiences a brief resurgence during or following a severe decline. This may also be known as a "sucker rally".

<span class="mw-page-title-main">Foreign exchange market</span> Global decentralized trading of international currencies

The foreign exchange market is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the credit market.

<span class="mw-page-title-main">Candlestick chart</span> Type of financial chart

A candlestick chart is a style of financial chart used to describe price movements of a security, derivative, or currency.

A breakout is when prices pass through and stay through an area of support or resistance. On the technical analysis chart a break out occurs when price of a stock or commodity exits an area pattern. Oftentimes, a stock or commodity will bounce between the areas of support and resistance and when it breaks through either one of these barriers you can consider the direction that it's heading in a trend. Often the resistance level the price breaks through becomes a new support level, and vice versa. This can be a "Buy" or "Sell" signal depending on which barrier it broke through.

<span class="mw-page-title-main">Bollinger Bands</span> Statistical price volatility chart

Bollinger Bands are a type of statistical chart characterizing the prices and volatility over time of a financial instrument or commodity, using a formulaic method propounded by John Bollinger in the 1980s. Financial traders employ these charts as a methodical tool to inform trading decisions, control automated trading systems, or as a component of technical analysis. Bollinger Bands display a graphical band and volatility in one two-dimensional chart.

A chart pattern or price pattern is a pattern within a chart when prices are graphed. In stock and commodity markets trading, chart pattern studies play a large role during technical analysis. When data is plotted there is usually a pattern which naturally occurs and repeats over a period. Chart patterns are used as either reversal or continuation signals.

The commodity channel index (CCI) is an oscillator indicator that is used by traders and investors to help identify price reversals, price extremes and trend strength when using technical analysis to analyse financial markets.

In finance, a trend line is a bounding line for the price movement of a security. It is formed when a diagonal line can be drawn between a minimum of three or more price pivot points. A line can be drawn between any two points, but it does not qualify as a trend line until tested. Hence the need for the third point, the test. Trend lines are commonly used to decide entry and exit timing when trading securities. They can also be referred to as a Dutch line, as the concept was first used in Holland.

<span class="mw-page-title-main">Pivot point (technical analysis)</span>

In financial markets, a pivot point is a price level that is used by traders as a possible indicator of market movement. A pivot point is calculated as an average of significant prices from the performance of a market in the prior trading period. If the market in the following period trades above the pivot point it is usually evaluated as a bullish sentiment, whereas trading below the pivot point is seen as bearish.

Stochastic oscillator is a momentum indicator within technical analysis that uses support and resistance levels as an oscillator. George Lane developed this indicator in the late 1950s. The term stochastic refers to the point of a current price in relation to its price range over a period of time. This method attempts to predict price turning points by comparing the closing price of a security to its price range.

Forex autotrading is a slang term for algorithmic trading on the foreign exchange market, wherein trades are executed by a computer system based on a trading strategy implemented as a program run by the computer system.

<span class="mw-page-title-main">Fibonacci retracement</span> Technical analysis method (Finance)

In finance, Fibonacci retracement is a method of technical analysis for determining support and resistance levels. It is named after the Fibonacci sequence of numbers, whose ratios provide price levels to which markets tend to retrace a portion of a move, before a trend continues in the original direction.

<span class="mw-page-title-main">Matchbook FX</span>

Matchbook FX was an internet-based electronic communication network for trading currency online in the Spot-FX or foreign exchange market. It operated between 1999 and 2002.

<span class="mw-page-title-main">Ichimoku Kinkō Hyō</span>

Ichimoku Kinko Hyo (IKH) (Japanese: 一目均衡表, Hepburn: Ichimoku Kinkō Hyō), usually shortened to "Ichimoku", is a technical analysis method that builds on candlestick charting to improve the accuracy of forecast price moves.

Price action is a method of analysis of the basic price movements to generate trade entry and exit signals that is considered reliable while not requiring the use of indicators. It is a form of technical analysis, as it ignores the fundamental factors of a security and looks primarily at the security's price history. However, this method is different from other forms of technical analysis, as it focuses on the relation of the security's current price to its price history, which consists of all price movements, as opposed to values derived from the price history.

<span class="mw-page-title-main">MIDAS technical analysis</span> Approach to technical analysis in finance

In finance, MIDAS is an approach to technical analysis initiated in 1995 by the physicist and technical analyst Paul Levine, PhD, and subsequently developed by Andrew Coles, PhD, and David Hawkins in a series of articles and the book MIDAS Technical Analysis: A VWAP Approach to Trading and Investing in Today's Markets. Latterly, several important contributions to the project, including new MIDAS curves and indicators, have been made by Bob English, many of them published in the book.

<span class="mw-page-title-main">Order flow trading</span> Trading strategy

Order flow trading is a type of trading strategy and form of analysis used by traders on the markets, other popular forms of market/trading analysis include technical analysis, sentiment analysis and fundamental analysis.

References

  1. ↑ Amiri, M.; Zandieh, M.; Vahdani, B.; Soltani, R.; Roshanaei, V. (January 2010). "An integrated eigenvector–DEA–TOPSIS methodology for portfolio risk evaluation in the FOREX spot market". Expert Systems with Applications. 37 (1): 509–516. doi:10.1016/j.eswa.2009.05.041.
  2. ↑ McLeod, Gregory (21 January 2014). "Forex Support and Resistance Explained". Daily FX. Retrieved 13 August 2015.
  3. ↑ Zapranis, Achilleas; Tsinaslanidis, Prodromos E. (October 2012). "Identifying and evaluating horizontal support and resistance levels: an empirical study on US stock markets". Applied Financial Economics. 22 (19): 1571–1585. doi:10.1080/09603107.2012.663469. ISSN   0960-3107.
  4. 1 2 3 4 Schlossberg, Boris (2006). Technical Analysis of the Currency Market: Classic Techniques for Profiting from Market Swings and Trader Sentiment. John Wiley & Sons. ISBN   9780471973065.
  5. ↑ "Mastering Price Action Trading with Supply and Demand". 2022-11-08. Retrieved 2024-03-03.
  6. ↑ "A Guide To Correctly Drawing Support and Resistance Levels Accurately". The Forex Guy. Retrieved 13 August 2015.
  7. ↑ "Identify support and resistance on a chart". FX Street. Retrieved 13 August 2015.
  8. ↑ "Support and Resistance Levels". Investors Underground. Day Trading Encyclopedia. Retrieved 29 June 2016.
  9. ↑ Thomsett, Michael C. "Support and resistance simplified". Google Scholar. Retrieved 13 August 2015.
  10. ↑ Stanley, James. "The Hidden Patterns of Support and Resistance in the Forex Market". Yahoo! Finance. Retrieved 13 August 2015.

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