Probably the most basic and simple indicators in technical analysis, these are key points in which the current trend is especially likely to change. Understanding these indicators allows you to predict trend changes, so learning how to use them is essential for every trader. In this article, we provide you with a brief explanation of how these indicators work and how you can employ them for trading.
How these indicators work
Basically, these indicators are certain price levels in which the current trend is especially vulnerable. It doesn’t mean that the trend will definitely change after reaching one of these points, but it’s very likely to do so. The logic behind these points is simple: when a sufficient number of buyers or sellers gather together, they have the power to reverse the ongoing trend or create a new sideways trend.
While support and resistance levels mark important points on which the current trend may stop, there are several outcomes. The price may move into a horizontal flat or head back to the support level, but something may also push the price past the level, continuing the trend.
Support level is a price level on which traders are inclined to purchase. When the market declines, the lower the price goes, the more buyers want to buy the asset. On some level, there are enough buyers willing to purchase everything sellers have to offer. The demand meets the supply, and the price of the asset will probably stop going down. This is what traders call a support level, and it is often a suitable time to open long positions or close short ones.
Resistance level is an opposite indicator: it is a price level on which traders are more likely to sell. The price of any asset usually has some temporary upper limit. When that limit is reached, many sellers on the market want to sell their assets, but now there are not enough buyers willing to purchase it. Again, the supply meets the demand, so the price of the asset will probably stop growing. Traders call such a limit a resistance level, and it marks a suitable time to open short positions and close long ones.
How to use them for trading
Start by looking for extremes on various timeframes. If you find coincidences, consider how often the price touches those levels: the more, the stronger that level is. Look for flat ranges and wait for them to break, then open trades at the moment of exit or trend change. Each asset is unique, so watch for any interesting patterns, they may prove useful.