Support and
resistance
Support and resistance is a concept in technical analysis that the price of
a security will tend to stop and reverse at certain predetermined price
levels.
Support
A support level is a price level where the price tends to find support as it
is going down. This means the price is more likely to "bounce" off this
level rather than break through it. However, once the price has passed this
level, even by a small amount, it is likely to continue dropping until it
finds another support level.
Resistance
A
resistance level is the opposite of a support level. It is where the price
tends to find resistance as it is going up. This means the price is more
likely to "bounce" off this level rather than break through it. However,
once the price has passed this level, even by a small amount, it is likely
that it will continue rising until it finds another resistance level.
Identifying support and resistance levels
Support
and resistance levels can be identified by trend lines. Some traders believe
in using pivot point calculations.
The more often a support/resistance level is "tested" (touched and bounced
off of by price), the more significance given to that specific level.
If a price breaks past a support level, that support level often becomes a
new resistance level. The opposite is true as well, if price breaks a
resistance level, it will often find support at that level in the future.
Using support and resistance levels
This is an
example of support switching roles with resistance, and vice versa:
If a stock price is moving between support and resistance levels, then a
basic investment strategy commonly used by traders, is to buy a stock at
support and sell at resistance, then short at resistance and cover the short
at support as per the following example:
When judging entry and exit investment timing using support or resistance
levels it is important to choose a chart based on a price interval period
that aligns with your trading strategy timeframe. Short term traders tend to
use charts based on interval periods, such as 1 minute (i.e. the price of
the security is plotted on the chart every 1 minute), with longer term
traders using price charts based on hourly, daily, weekly or monthly
interval periods. Typically traders use shorter term interval charts when
making a final decisions on when to invest, such as the following example
based on 1 week of historical data with price plotted every 15 minutes. In
this example the early signs that the stock was coming out of a downtrend
was when it started to form support at $30.48 and then started to form
higher highs and higher lows signaling a change from negative to positive
trending.
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Accumulation Distribution
Bollinger Bands
Commodity Channel Index
Momentum
Money Flow
Moving Average
On Balance Volume
Parabolic SAR
Relative Strength Index
Stochastic oscillator
Support and Resistance
The Elliott wave principle
Trend Lines
Triple Exponential Average
Volume At Price
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