Support and resistance levels (SR levels) are core concepts in technical analysis that traders use to make informed decisions on market directions and behaviours. Despite being one of the most common analysis techniques; they are often misunderstood. By identifying these levels on the charts, traders can anticipate potential buying and selling opportunities. In this article, we will explore the basics of support and resistance, including what they are, how to draw them, and their significance in trading. We shall focus on horizontal levels in this idea.
What is a Support?
Support refers to a price level at which an asset's price has historically struggled to fall below. It is the level at which demand for the asset exceeds supply, leading to an upward price reaction when price touches in (in theory). Support levels act as a floor, preventing the price from declining further. Traders should can and often look for support levels to identify potential buying opportunities as these are areas the price might see a bounce.
What is a Resistance?
Resistances on the other hand are price levels at which an asset's price has struggled to rise above. It is a zone where selling pressure is greater than buying pressure, causing the price to reverse its upward momentum. Resistance levels act as a ceiling, preventing the price from climbing higher. Traders seek resistance levels to identify potential selling opportunities, expecting the price to retreat from that level.
SR levels can also help traders identify potential entry and exit points. Breakouts occur when the price successfully breaches a significant resistance level or support level suggesting a potential trend continuation. Traders can interpret these breakouts as signals to enter or exit positions, depending on the direction of the breakout.
How do you draw SR levels?
When it comes to drawing support and resistance levels, traders have two main approaches: drawing them from the wicks (shadows) or drawing them from the bodies of the candles. Let's explore these ideas in more detail:
Drawing SR Levels from the Wicks:
Drawing SR levels from the wicks involves the trader identifying the extreme high or low points reached by the price during a specific time period. These points are represented by the upper and lower wicks of the candlesticks on a price chart.
Drawing SR Levels from the Bodies:
Drawing support and resistance levels from the candle bodies involves focusing on the open and close prices rather than the extreme high and low points. This approach offers a more consolidated view of price levels and generally less variation.
The advantage of using wicks to draw support and resistance levels is that they capture the extreme price movements and provide a wider perspective on the market action. However, since wicks represent and are subject to more anomilies, some traders prefer to draw support and resistance levels from the candle bodies. It is totally ok to allow for a small level of deviation when drawing these. Markets are not perfect.
Both approaches are equally valid however a trader should be careful not to use their bias to overfit SR levels to suit them. Pick one method and stick to it.
Generally it is also recommended to aim for 3 touches of the SR level for it to be considered valid or more significant.
The transformers - polarity
SR polarity, or polarity flips are a concept in SR trading where a support level can change into a resistance level, or the other way around. It shows a shift in market sentiment and is important for traders to understand. When support becomes resistance, it means there might be selling pressure and a possible reversal in price. On the other hand, when resistance turns into support, it suggests a positive market sentiment and potential buying opportunities. When price breaks through a resistance that resistance essentially becomes a support and visa versa.
Thank you for reading and hopefully this SR guide helps!
What is a Support?
Support refers to a price level at which an asset's price has historically struggled to fall below. It is the level at which demand for the asset exceeds supply, leading to an upward price reaction when price touches in (in theory). Support levels act as a floor, preventing the price from declining further. Traders should can and often look for support levels to identify potential buying opportunities as these are areas the price might see a bounce.
What is a Resistance?
Resistances on the other hand are price levels at which an asset's price has struggled to rise above. It is a zone where selling pressure is greater than buying pressure, causing the price to reverse its upward momentum. Resistance levels act as a ceiling, preventing the price from climbing higher. Traders seek resistance levels to identify potential selling opportunities, expecting the price to retreat from that level.
SR levels can also help traders identify potential entry and exit points. Breakouts occur when the price successfully breaches a significant resistance level or support level suggesting a potential trend continuation. Traders can interpret these breakouts as signals to enter or exit positions, depending on the direction of the breakout.
How do you draw SR levels?
When it comes to drawing support and resistance levels, traders have two main approaches: drawing them from the wicks (shadows) or drawing them from the bodies of the candles. Let's explore these ideas in more detail:
Drawing SR Levels from the Wicks:
Drawing SR levels from the wicks involves the trader identifying the extreme high or low points reached by the price during a specific time period. These points are represented by the upper and lower wicks of the candlesticks on a price chart.
Drawing SR Levels from the Bodies:
Drawing support and resistance levels from the candle bodies involves focusing on the open and close prices rather than the extreme high and low points. This approach offers a more consolidated view of price levels and generally less variation.
The advantage of using wicks to draw support and resistance levels is that they capture the extreme price movements and provide a wider perspective on the market action. However, since wicks represent and are subject to more anomilies, some traders prefer to draw support and resistance levels from the candle bodies. It is totally ok to allow for a small level of deviation when drawing these. Markets are not perfect.
Both approaches are equally valid however a trader should be careful not to use their bias to overfit SR levels to suit them. Pick one method and stick to it.
Generally it is also recommended to aim for 3 touches of the SR level for it to be considered valid or more significant.
The transformers - polarity
SR polarity, or polarity flips are a concept in SR trading where a support level can change into a resistance level, or the other way around. It shows a shift in market sentiment and is important for traders to understand. When support becomes resistance, it means there might be selling pressure and a possible reversal in price. On the other hand, when resistance turns into support, it suggests a positive market sentiment and potential buying opportunities. When price breaks through a resistance that resistance essentially becomes a support and visa versa.
Thank you for reading and hopefully this SR guide helps!