Support and Resistance
Support and resistance are one of the most fundamental concepts in technical analysis. The terms are being used in context of how they interact with price during its journey.
Support: Support is a horizontal level where price, when falling down, may reverse or halt. These levels have buyers ready to buy and sellers ready to book their profits. Sellers in order to square off their position may buy at these levels and thus making the prices bounce or reject.
Resistance: Resistances are horizontal level where price may reverse or halt while going up. Sellers are interested at these levels as the price seems stretched. The buyers try to book their profit near these levels and thus adding to selling pressure.
Similarity with Supply and Demand zones: There is somewhat similar concept of supply and demand zones. These concepts are different from support and resistance and has more nuances. But at a basic level any zone that tends to push prices up can be deemed as support and zones that push prices down can be called resistances.
Dynamic Support and Resistances: There are courses where the trainers have introduced the concept of dynamic support and resistances. These include trendlines, moving averages, etc.. Some of these constructions and indicators seems to give support to prices and hence are called dynamic resistances. We can name them whatever we want but the crux of the concept is that the prices tend to respect certain levels/zones/indicators. We need to be cognizant of this behaviors as we start to read charts. We can use these concepts to structure our analysis and spot opportunities.
Drawing Support and Resistance
Look at the above chart. We can see that the prices were being rejected from two levels, 6909 and 6715. The fact that buyers were unable to push the prices beyond 6909 the first time made the buyers exit the longs near that level when the price approached the level second time. Sellers were also aware that there are strong sellers available above 6909. This made them take fresh short position near that level the next time. This is the reason why people try to draw the resistances and support looking at the past price action. Mostly these are drawn using previous highs and low. I also want to emphasize that the levels are not horizontal lines but are zones and areas where the buyers and sellers might be available. We have to be very cautious while taking trading decisions using supports and resistances. These support and resistances marked on our chart does not effect the market and the price might go uninterrupted through these levels. We should use other data points to confirm our beliefs. We can use chart patterns, candlesticks , oscillators etc., to confirm our trades.
Drawing support and resistances is more of an art and can be perfected by practice and forward testing. The way I try to draw these levels will be discussed in another article. I would suggest to go through my methods and methods of others and use that as an input to develop your own method.
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