Support & Resistance 101 The Basic Understanding of Support & Resistance
By Alwin Ng
Copyright Š www.MarketApprentice.com
Support & Resistance 101
www.MarketApprentice.com
Contents 1
Introduction ........................................................................................................................ 3
2
Definition ............................................................................................................................ 4 2.1
Support ........................................................................................................................ 4
2.2
Resistance .................................................................................................................... 4
3
Why use Support & Resistance? ........................................................................................ 5
4
How it works? ..................................................................................................................... 6
5
Forms and Shapes ............................................................................................................... 6
2
Support & Resistance 101
www.MarketApprentice.com
1 Introduction Since Support & Resistance (S&R) plays an important role in the world of technical analysis, mastering the basic knowledge of support & resistance will be crucial to help you when advancing into becoming an intermediate or advance level trader. Before you start looking at any lessons on support and resistance, it is worth having a read of this short document which will give you a background of support and resistance from the technical analysis point of view. Once you’ve read this, make sure to refer to it every now and then when you are going through the course. I personally use support and resistance very frequently and, hence, I would like to invite you in getting this concept/idea right as soon as possible. Once you understand it, you can get the ball rolling and be able to appreciate the bulks of my market analysis.
3
Support & Resistance 101
www.MarketApprentice.com
2 Definition 2.1
Support
A support level is a price level where an asset class has had difficulties falling below. As shown above, price of GBPUSD tested the 1.591 support level several times and it is at the 3rd attempted when price finally failed and it made an aggressive move upwards. The market psychology is such that many buyers have placed their buy orders at this price and price gets push higher every time it reaches this price. 2.2
Resistance
4
Support & Resistance 101
www.MarketApprentice.com
A resistance level is a price level which an asset class has had difficulty pushing above. In this example, the GBPUSD chart showed that buyers tried to push price higher several times. However, each time it tested the 1.541 resistance level it failed to move above it. The market psychology is such that many sellers have their sell orders at this price and price gets push lower every time it reaches this level. Since there were more sellers than buyers, the sellers won the war and price moved lower after the 29th July (3rd arrow).
3 Why use Support & Resistance? As you should realise by now that Price Never Moves in a Straight Line (if not, please read the document “How Market Works” before you continue further) and, since they don’t move in a straight line, professional traders rely on small corrections or market pullbacks to enter the market in order to take advantage of Trending market conditions. Some traders would also take advantage of reversing market to enter a trade. The question is, where do market pullbacks or correction ends? And where do they start moving back into the major trend direction? This is where S&R plays an important role. That’s because price will very often turn at or around areas of S&R. Just like the examples of GBPUSD, price was pushed higher or lower due to the support/resistance level. Hence, taking a trade around these areas is considered to be a high probability and low risk market entry.
5
Support & Resistance 101
www.MarketApprentice.com
4 How it works? A support and resistance price level is a Technical or Psychological Levels where Price meets a “Barrier” (metaphorically). When price reaches this barrier, price either travels
Towards it Consolidates (Test) around it Breaks it, or Away (Bounce) from it
These barriers are strongest when they have not been broken for a long time or when they are rarely broken. When these barriers are broken, the Strength of the barrier reduces. That also means that the probability of it being broken again increases. In section 2, both the examples of GBPUSD showed that price were consolidating and testing the support and resistance levels. In the end, both of them bounced away. The truth is, while any of the above could happen, we don’t know when and which one will. We can, however, rely on the probability of this happening. Since price has bounced for 2 times (in both example), the probability that it will bounce on the 3rd time is high. This is important because we are always looking for high probability set ups.
5 Forms and Shapes Support and resistance, as you will learn in the course, comes in different shapes and forms. The most important type is the Horizontal S&R. The types of S&R that you will learn include:
Horizontal S&R Trend Line S&R Move Average S&R Fibonacci S&R
With that, I would invite you to proceed with the lessons here are the online learning hub.
6