Support and Resistance

supply verses demand

supply verses demand

Supports and resistances are points in the price of an entity (it can be a share or a currency pair or a commodity or any other entity) where the prices stall. They have got more to do with history and user sentiment. Lets say that the price of the entity is 5 to begin with. It begins to rise and it keeps rising and seeing this price, more and more people would want to jump in and they keep buying and the price rises even more. This means that the demand is more than the supply and as long as this happens, the price will rise.

The price will continue to rise until a stage is reached where people start to feel that the price has become high enough or those who bought it early feel that they have earned enough profit. Lets say that at this point, the price of the entity is 10. So, people start feeling that the price has risen too much (this is also called overbought conditions) and slowly start selling. The demand becomes less than or equal to the supply and the price slowly drops from 10. As the price continues to drop, the people who plan to make money on shorts also jump in and the buyers (even though they might have very less profits or are in loss) start getting panicky and they start selling and the price starts falling more and also at a faster rate.

So the price continues to drop from 10 and thus 10 becomes resistance as the price has not breached 10. Next time the price comes close to 10, the buyers and the sellers will look at past history and find that 10 was the place where selling started the previous time and so the buyers would want to get out at that point just to be on the safer side and so 10 becomes a even bigger resistance.

The price drop from 10 continues and at one place, the opposite to the one explained above happens ie. the users feel that the price has dropped too much (say at 2) and they start buying again and the price starts to rise again. Thus 2 becomes the support.

Remember, the greater the amount of time that a support or resistance has not been broken, the stronger it is. Even yesterdays high and low are resistance and support respectively but they are not very strong as they are quite recent prices.

So, always watch out for supports and resistances. The big banks and traders dont sit with their ema or whatever indicators and buy and sell based on that. They look out for stops and resistances and buy / sell based on that. So be careful, watch out for opportunities and get a feel of the market before jumping in.

By Karthik Subramanian

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Casey founded Winners Edge Trading in 2009 and is working to create the most current and useful Forex information and training available on the internet.

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  • soni manutd

    if i set support/resistance lines on a pair, then i change templates on that pair, how do i keep the S/R lines visible ? usually changing templates, those lines are gone…

  • Alfred Parengkuan

    what time frame that the support and resistance are better to made?

  • Elie Haykal

    Well said and explained !

  • peter

    thanks for that analysis, it looks quite simple but very powerful. More power to your elbow.

  • Raajan.vk

    Raajan,

    This article being good to study about other trader feel moreover it is useful for me because most of the time i have worked with the EMA so, thank you karthick

  • Sashi

    Well said Mr.Karthik. A nice phara to remind again about support and resistance. Anyway thank you.

  • http://twitter.com/ns_karthik Karthik Subramanian

    Thanks Pat…

  • http://twitter.com/ns_karthik Karthik Subramanian

    Glad that i could be of help,Shalom !!

  • http://www.winnersedgetrading.com caseystubbs

    You can check these two posts here and we will be posting more info tomorrow.

    http://www.winnersedgetrading.com/murray-lines/

    http://www.winnersedgetrading.com/murray-math-lines/

  • Anonymous

    thank u this resolved some puzzles
    regards to casey as well

  • James Sutter

    Where can I get a basic tutorial or explanation of MM.

  • Patricio A

    Yes you got the point. I share my early mistake: I used to see sr and immediately the pair stalls put the order, and more often the price breaked the level…But I’m glad to say that after a year of learning in a hard way, it happens almost never…
    Good post Karthik, nice to see you here!!!

  • http://twitter.com/ns_karthik Karthik Subramanian

    glad you liked it !!

  • Invincible_Evil

    Thanks for the simple explanation. Awesome work.

Support and Resistance

This is the most important skill in technical trading

Support is a lower level that the price has not broken recently

Resistance is an upper price level that the price has had trouble breaking

Some examples of each and how to use them.

Support and Resistance

The tops are resistance levels and the bottoms are support levels. Once a level has been established the more important the level becomes.

For example if the price goes down to the support level then moves to the upside then goes back down to the orginal support level and breaks down through. That is significant and at that point you can enter a short trade.

Once the price breaks through the support. That support level becomes resistance.

Support and Resistance

You can see how the price kept challenging those levels. So you would not want to enter a trade until after the level was broken then you know that your chances of a better trade exist.

Trend Lines

Another type of support levels is trend lines. Draw a trend lines along the bottom or top of a price channel and once the price breaks the line then the trend is broken.

Support and Resistance

This is an up trend draw your trendline alone the bottom of the price movements. If the price drops and bounces off of the trend line you know that the trend is still in effect. the price drops and continues down you know that the trend is not in effect and that would be a good place to put in a short trade.

It is also useful to use support and resistance levels to set up your stop losses, watch this video. To learn how to properly setup stop losses.

The following two tabs change content below.
Casey founded Winners Edge Trading in 2009 and is working to create the most current and useful Forex information and training available on the internet.

Winner’s Edge Trading, as seen on:

Winner's Edge Trading in the news