Knowledge, tools, technical analysis indicators need to be mastered when participating in the stock market - Part 4: Resistance , Support

June 26, 2021

I. What is resistance and what is support?

Resistance and support are price areas at which investors expect the price to reverse.

Meeting the resistance level is likely to reverse from an uptrend to a downtrend.

Meeting the support level is likely to reverse from a downtrend to an uptrend.

II. Learn more about the nature of resistance – support

Resistance – hard support: are high-precision support-resistance; usually hard support resistance is major time frame support resistance like May, but depending on the type of market and the time period you are trading hard support resistance will vary.

You trade on the 1h frame, the hard support resistance can be the daily time frame's support resistance, or you participate in the market with a large cycle like stocks, forex, how to determine the hard support resistance level will be different from low cycle markets like crypto….

Resistance and support cannot or 100% be broken is not true: nothing is certain in the market, that's why we call stocks a game of probability, resistance and support are born to test. According to investors' psychology, current expectations about the future, the notion that resistance and support cannot be broken or is certain to be broken is wrong.

Resistance – support level: not a point-threshold-mark but a price support-resistance area, why is it called a zone because support-resistance is formed on a set of points close together where price can reverse direction, so there is no exact price to show whether the price is support-resistance, it is a price area

III. Basic types of support resistance

Old price reversal zones: also known as bottoms and tops, technical experts often follow a concept that prices will repeat in the past, so now they rely on past actions to make judgments for the future. In the example below, we see that in the past, the VNI point reversed at symbol 1, then at numbers 2, 3, 4, investors sold out like in the past.

Round price zone: is the price range of stocks, goods will round for example at 10,000 VND/share; 20,000 VND/share; 50,000 VND/share, 100,000 VND/share

In crypto: BTC repeatedly confirms support around $6,000/BTC

Trendline : Also a type of support resistance, a trendline is formed by connecting two recent peaks or troughs of a trend.

+ If the line connecting two peaks is pointing down, we have a downtrend.

+ If the line connecting the two bottoms points up, we have an uptrend.

         A reference price channel can form from 2 trendlines, the upper line connecting the peaks, the lower line connecting the troughs, if so, we have four cases for the price channel created by 2 trendlines.

Here, the trendline connects the bottoms together, making it easy to see the uptrend of the current market.

Resistance and support convert for each other: a resistance level after being broken can become a support level and conversely a support level after being broken becomes a resistance level.

How to trade based on Support and Resistance?

Support is usually below the current rate and often forms a temporary “price floor”. This means that the exchange rate is more likely to touch and then bounce back than to penetrate support.

The resistance will be above the current rate, and form a temporary “price ceiling”. Rates that hit resistance often bounce back and are rarely strong enough to break immediately.

Support and Resistance levels are important to technical analysts, as these levels are often times when rates typically bounce back or break these important levels. Normally, the bounce will happen more often, otherwise, if it breaks, this will be a signal to you that the trend is about to change direction.

Also, when a support level is broken, it becomes a resistance in itself. And when the resistance level is broken, it turns into support itself.

How to determine support & resistance levels?

There are many methods and tools for determining support and resistance levels, some examples include:

Previous tops and bottoms

Candlestick pattern

Moving Average MA

Trend line

Bollinger Bands indicator

Fibonaaci indicator retracement

Let’s focus on a few examples based on the list above:

Here is a graph of the US500 ticker, with a clear trend line. This trendline will be an important support level, keeping the rate from falling too deeply. In this example, you can rest assured that the rate will stay above this trendline.

We move on to another example with a Silver product with an SMA. The SMA used to be an important resistance level, but has since been broken and has now become a support line.

Another example on the USDCHD pair, the resistance line crossing the first high was very strong, the market tried to break it several times but failed and bounced back.

To summarize, there are many methods for identifying support and resistance lines, and broadly speaking, technical analysis is the analysis of potential support and resistance lines.

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