Of all the various elements of technical analysis, the most vital and practical of them are support and resistance. There are a lot of other elements involved in technical analysis that also rely on support and resistance. This includes price patterns. Support is the low mark of the price of a stock that is reached over time. Resistance is the high level of the stock price reached over time. Support takes place when the share price goes down to a level that leads traders to purchase the shares. This type of buying causes the price of the share to stop declining and start growing also. Also, resistance happens when a share price increases to a mark that leads traders to sell. This leads to the price of the share to stop growing and start declining. One of the manners in which a trader can find support and resistance levels is to create imaginary lines on a chart that connects the highs and lows of the price of a share. These lines can be created diagonally and horizontally. Also, the levels created here are only estimates and not actual prices. Traders can also seek to focus on price zones when finding out about these zones.
The support and resistance are pointed out with angled or horizontal lines. These are also known as trendlines. Suppose the price of the share stops moving in any single direction and starts reversing in the same price area on different occasions in quick succession. In that case, a horizontal line is created to highlight that the market is not able to move past that zone. In an uptrend, the price of the share makes higher lows and higher highs. In any downtrend, the price of the share makes lower highs and lower lows. You can connect the lows and highs during a trend. Then, you can extend the line out to the right to find out where the price of the share may find support and resistance in the future. These lines point out the chart patterns, such as ranges and trends. They give the traders a viewpoint of how the financial markets are presently moving and what could probably happen in the future.
These levels do not stay for too long. When the share price is trending lower, it will create a low and then reverse. After that, it will start to decline again. That low can be pointed out as a minor support area. This is because the price of the share did stop moving and bounced off that mark. But since the overall trend is down, the price of the share is finally going to fall through the minor support level without any issues. The zones of minor support and resistance give trading chances and data for analysis. In the instance given above, if the price declines below the minor support mark, the traders think that the downtrend is still ongoing. But if the price of the shares stops moving and reverses near the former low, then there could be a probable range in the making. If the price of the share stops moving and goes above the prior low, then there is a higher low. This is a chance that there might be a potential change in the trend. The major support and resistance areas are the price levels that have recently led to a reversal in the trends.
If the price of the share was going higher and then bounced, the price where the bounce happened is a robust resistance mark. Where a downtrend finishes and an uptrend starts is a robust support level. When the price of the share makes a comeback to a major support or resistance area, it will often not be able to go through it and move back in the opposite direction. For instance, if the price declines to a robust support level, it will bounce off often. The price of the share may finally break through it. But it usually goes back from a level sometime before doing that.
The usual practice of utilizing these tools is to purchase near the support in the uptrends or the portions of the patterns where the price of the shares is moving up. Similarly, traders prefer to sell near the resistance in downtrends or the portions of the patterns where the prices of the shares are going down. It assists in isolating a trend that is present over the long term. This is even when trading through a pattern. The trends give guidance on the overall direction that you should trade in. For instance, if the trend is down, but a range is created afterward, the preference should be given to selling the shares at range resistance instead of purchasing at range support. The downtrends help us determine that selling the share has a better chance of gaining some gains than purchasing. If the trend is going up and a triangle pattern forms, traders should think about purchasing the shares supporting the overall triangle pattern. Purchasing near the support or selling near the resistance can pay off well. But there can be no assurance that the levels will hold for sure.
So, you can think about waiting for greater confirmation that the financial markets are still upholding that zone. If you are purchasing near the support, you should wait for some consolidation in the support area. You can then go on to purchase when the price of the share goes above the high of that small area. When the price of the shares makes some move like that, it helps you know that the price is still in the support area and that the price is going to move higher off the support. The same theory also applies to selling the shares at resistance. The trader can wait for consolidation near the resistance area. They can then sell the shares when the price declines below the low of the small consolidation. Traders can put a stop loss several pips below the support when purchasing. Similarly, they should place a stop loss several pips above the resistance when they are selling. You may be waiting for a consolidation. Then place the stop loss a couple of pips below the level of consolidation when purchasing. When selling, the stop loss will go a couple of pips above the level of consolidation.
You must have a target cost set to exit the trade at the right moment. You can also exit from the trade at the major or minor support and resistance marks. For instance, you may be purchasing at support in a rising trend area. Then, you can think about selling at the top of that area. In various cases, you may also get more gains if you let a breakout happen instead of selling at minor support and resistance levels. For instance, you may be purchasing near the triangle support within a bigger uptrend. Then, you may wish to uphold the trade until it goes through the triangle resistance and stays on with the uptrend. The old resistance can become the new support and vice versa. That is not what always happens. But it does work quite well in a lot of conditions.
Support and resistance are tools used in technical analysis to determine when to enter and exit trades in the financial markets. Technical analysis is one of the methods traders use to find out the future price of the market or a share. Several investors might utilize technical analysis and fundamental analysis together. But they will utilize fundamental analysis to determine what to purchase and technical analysis to determine when to purchase. You must not forget that technical analysis is not a precise science and is open to interpretation. You may continue your study of technical analysis. Then you may hear some say that it is an art rather than a precise science. As with most disciplines, it takes some work and time to become good at it.