What are Support and Resistance Lines?

What are Support and Resistance Lines?

What do support and resistance lines help out with?

Support and resistance lines are tools applied for technical analysis (TA) and are accounted for as significant price actions, which prevent asset prices from bypassing certain set points.





Support Lines



Support lines are indications of high buying demand and can stop the movement of downward trends as prices that travel near a drawn support line are viewed as cheap and indicate that assets are practically worth buying. Therefore, investors tend to buy at this mark, resulting in a reversal of the graph. 



Nonetheless, if the selling demand is still present, the graph can potentially bypass the support line entirely, creating a new and lower one, which may even result in more asset sales as investors may view that it is suitable to cut their losses before prices dip even further.





Resistance Lines



Resistance lines are points in which assets indicate higher selling demand over buying, due to the analysis that investors are more likely to sell their assets as prices have skyrocketed to a desirably profitable point. Simultaneously, potential buyers would be discouraged as the prices are already evidently high, making the price meet the resistance line and reverse back downward.



When a resistance line is bypassed, a new one is created. However, the new one would be drawn at a higher point, which can potentially point out that an asset’s price may become even higher in the near future.





Line observation



1. Observe a graph’s low points for support lines and high points for resistance lines.



2. When a resistance line is bypassed and eliminated, it could still be used once again in the future as a support line, and support lines and resistance. 3. Psychological support-resistance lines are indicated when prices are full and down end in continuous decimal points. I.e. 00, 50 or even 1.00 and 1.50. This is caused by a collective viewpoint that this price point would be suitable for trading.



4. Another means of indicating these lines is utilizing the Fibonacci Ratio, a tool used for creating support-resistance lines and finding a desirable price point. The Ratio includes the use of the Fibonacci Retracement and Trend-based Fibonacci Extension tools.





Strength of Support-Resistance Lines



The more they are tested, the stronger and more trustworthy these lines are. When a price approaches near the support-resistance lines, there is a high probability that the price graph would eventually be in reversal. However, if there is adequate buying-selling demand, the price is likely to be highly volatile.





Other uses of Support-Resistance Lines



Other than being a price indication tool, support-resistance lines are also utilized as Moving Averages (MA) or Trend lines, which are used for trend analysis.





Conclusion



Support-resistance lines are basic technical analysis tools that investors use, in cooperation with other methods, to indicate a suitable point of entry or exit from a market (through buying or selling). Like other methods, investors are highly advised to conduct deep research and manage risks in a suitable manner to prevent any potential damage from unpredictable price movements.





Reference



Stockcharts.com, SuperTraderRepublic

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