An Introduction to Support and resistance

Support and resistance levels

Support and resistance levels are key prices at which buyers or sellers have previously entered the market in enough quantity that they halt or reverse the price movement. These price levels are used by traders to identify where buyers or sellers are likely to enter into the market again.

They can be identified on price charts with horizontal lines where the price will come to a halt at the same level a number of times.

Resistance

The chart below demonstrates that if price is moving higher, it will eventually hit a "ceiling" — a point at which the price stops and reverses.

This is where sellers are entering into the market. They do so in such sufficient quantities, that they overpower the buyers and stop the price from going up any further.

When this happens, a resistance level has been identified where the price is likely to halt under selling pressure.

If the price works its way back to a previously established resistance level, sellers are likely to enter the market causing the price to stop at this level and reverse.

Resistance levels can therefore be used to enter into new short positions or as a profit target level to close current long positions.

Support

The chart below demonstrates that support identifies a price level where buyers are entering the market.

If the price is moving lower, it will eventually hit a “floor” where buyers enter the market in such sufficient quantities that they overpower the sellers and stop the price from going any lower.

When this happens, a support level has been identified. Support can be used in much the same way as resistance, but in this case, to either enter a new long position or to close a short position.

Identifying support and resistance levels

To identify support and resistance levels, you look at where the price repeatedly stops in the same place. This is where buyers or sellers are entering the market.



The chart above shows an example where price seems to rise and stop at the same price level repeatedly.

You can see in the chart below that by placing a horizontal line where the price seems to stop, it helps to identify a resistance level where sellers are entering the market and halting the price.

The chart below shows an example where the price moves down to a level where it halts repeatedly and then reverses back to the upside.

In the chart below, a horizontal line is placed at this price level to help identify a support level where buyers are entering the market and overpowering the sellers.

Support and resistance in a range

In a ranging market, the price encounters the same support and resistance levels several times before breaking out of the range.

Price finds resistance in a range

Price finds support in a range

Price finally breaks out of the range through support

As you can see in the chart above, the resistance level provides a clear upper boundary and the support level provides a clear lower boundary to the range.

A breakout eventually occurs after the sellers overpower the buyers and break through the established support level.

Placing S&R levels using wicks and bodies

The following two charts show examples of placing support or resistance lines using the wicks and the bodies of the candles. The chart below provides an example using the wicks of the candles to place a resistance line.

The following chart shows an example using the bodies of the candles for the resistance line. There is no correct way to place support and resistance; it is a matter of using one or the other to suit the trader, or the strategy being used.

Support and resistance zones

Support and resistance levels cannot always be precisely established with a single line; therefore it is sometimes better to establish a zone. In the chart below, you see that the price encounters resistance several times at different levels.

There is no single price level at which sellers are entering the market. The sellers overwhelm the buyers at different price levels. However, what is clear is that there is a resistance ‘zone’ where the sellers are entering the market.

Resistance can become support

Price breaks through a support or resistance level when one side has overpowered the other. When the price breaks through support or resistance, it is not uncommon for the price to come back to the breakout level before continuing on. In these cases, support can become resistance or resistance can become support.

To use the chart example below, the price broke through a resistance level, meaning that the buyers overpowered the sellers at this price.

Price finds resistance

Price breaks through resistance

Price comes back to the previous resistance level that has now become support

Those that sold at the resistance level would be taking a loss as the price continued to rise. As the price comes back to the previously established resistance level, those traders that went short would close their losing positions, bringing new buying pressure into the market.

Traders who have not entered the market yet will also enter new long positions at this price level in anticipation of a price increase and the price will continue to rise under additional buying pressure. The previously established resistance then becomes a support level.

Support can become resistance

Similarly, if the price breaks through a support level, when the price comes back up to this level, sellers will enter the market and the price will continue down. The chart below shows further examples of support becoming resistance and resistance becoming support. The same price level in this example acts as support and resistance multiple times.

Price finds support

 Price breaks through support

Price then comes back to the previous support level which has now become resistance

Price breaks through resistance and then finds support once again

Trading with support or resistance

You can use support levels to enter long positions. As you can see from the chart below, a support level has been established. When the price falls back to this level, it is likely that the price will rise again and so the support level can be used for entering into new long positions. The stop loss would be placed below the support level.

Support level

Price finds support at this level

Long entry after this price level successfully holds as support

Stop loss should be placed below the support level

Similarly, resistance levels can be used to enter into new short positions. In the chart below, a resistance level has been established and so the price is likely to fall when the price comes back up to this price level. A new short position can then be entered at this price and the stop loss can be placed on the other side of the resistance level.

Resistance level

Price finds resistance at this level

Short entry after price level successfully holds as resistance

Stop loss should be placed above resistance level

False breakouts

The chart below demonstrates the scenario where the price appeared to break through a resistance level, but it did not stay above – this is known as a false breakout.

Price finds resistance

Price broke through resistance level, but did not stay above

If a trader is looking to enter into a long position once the price has broken through a resistance level, to avoid entering on a false breakout, it is better to wait until the previously established resistance level is shown to hold as support.

Similarly, if a trader is looking to enter short trades once a support level has been broken, then the easiest way to avoid a false breakout is to wait until the support has held as resistance.

What To Avoid When Investing In Stocks

Investing in Stock Market is very rewarding financially. There are numerous investors who have made lot of money investing in Stock Market. If you are an active investor or starting out now, there will be numerous resources which will tell you what to do in Stock Market. This article will tell you all the things that you should avoid and not to do if you wish to make money in Stock Market.
There are few things that you should avoid in stock market trading if you wish to succeed and make money continually. These are listed below:

* Avoid arrogance while trading: Never bet on stocks thinking that you know all and can predict the market. Remember you can't predict the market completely as market moves on its own course. Stock Market works on information and there is no way that you and you alone will have all the information. When you make looses accept defeat humbly and start again.

* Entry into a buoyant sector: If you are new investor, chances are that you will want to buy stocks in a sector which is in the news and already doing well. This is the worst way to invest and almost surely the way to losses. When a sector is doing well, almost all the retail investors will be buying and that is the time good stocks in that sector will be overpriced. So, the price that you pay will be higher then the value that they deliver. You will make profits when you buy low and sell high not the other way round.

* Buying bottomed out stocks: Stocks that have bottomed out do not necessarily make excellent picks. When you pick some stock, the criteria should not be that it's cheap now. You never know when it can't go even lower and then rise. Besides, even if you buy it cheap you never know when it will rise higher.

* Value stock: Value is what you get and price is what you for a stock. Value is subjective and can't be measured in numbers. Remember that what is valuable for you may not be valuable for others. So, be confidant about what you pick, not what others pick for you.

* Perfect system: There is no perfect system to trade in this world. If you are looking for a perfect system then you are mistaken. There is no system where investor will get profits always. Each system has its pitfalls so do not follow any one system always or keep looking for that perfect system.
If you avoid above pitfalls you will not have any issues investing and making money. Stock Investments are a good way to channelize funds and get great returns. All you need to do is think different from the herd and then invest. Once you have some experience in investing you will be able to learn more and make more money.

Using Technical Analysis To Profit In Forex Trading

There are two basic ways to approach the analysis of the FOREX markets: Technical analysis and Fundamental Analysis. Someone who is using a fundamental analytical approach will look at the current economic climate, political events, a variety of economic indicators, and so on to try to predict currency moves. What we will examine is technical analysis, or the use of historical price patterns in economic data to predict future moves in the FOREX. We will also look at the tools used for technical analysis.

The three major assumptions underlying technical analysis are:

1 - All market forces are taken into account in price movement. Many things can affect the price of a currency. Some of these factors would be economic conditions, political happenings, natural disasters, seasonal supply and demand and even the weather. Technical analysis, however, does not attempt to take these into account because the market has already done that. Rather, a technical analyst is concerned with the actual movements of the market, not with the reasons for the movement.

2 - There are observable trends in currency prices movements. There are known market patterns that follow predictable paths.

3 - There are historical trends in price movements. Over a century of FOREX data collection has shown that human nature interacts with events in predictable ways. Thus, when circumstances are similar in the market, the same patterns will show up.

Technical Analysis: Is It Necessary?

Day traders in the FOREX usually use technical analysis most heavily, though they may supplement it with fundamental analysis. Technical analysis has the huge advantage of being applicable to a wide range of currencies and markets simultaneously. To properly do fundamental analysis requires a good knowledge of events and conditions in a certain country so the number of markets any particular trader can analyze by the fundamental approach is necessarily limited.

Technical analysis can seem so complicated to the beginner that they may be tempted to wonder if it is really needed. The truth is that all investing requires a strategy and technical analysis is a proven way to set strategy by predicting FOREX movements. Of course, no strategy or method is always successful, which is one reason many technical traders also do some fundamental analysis as a supplement.

Using Price Charts In Technical Analysis

Charts lie at the heart of technical analysis and you will find a good selection available from any online FOREX broker. Not only are the charts updated constantly, real time, but they can be viewed in a variety of ways. You can see movement over various periods of time, broken down into different time scales, and with various analytical overlays applied. With the software provided you can see the broad picture over a long period or zoom into the most minute detail. The basic software is free from most online Forex brokers but there may be a fee for the more professional, in-depth, information.

Sometimes the charts are a built-in part of the broker's software package. Alternately, they may be available on the broker's website.

Practice, or demo, accounts are available from most brokers on their website. These allow you to use the charts and tools of that particular software to learn the techniques of following charts, noticing and learning about trends and studying market movements. Nothing can substitute for this valuable period of becoming intimately familiar with charts and market behavior.