Levels of support and resistance are common terms in financial markets; but what are support and resistance levels? And how do they assist traders? Familiarity with these concepts occurs in the early stages of financial market education, and identifying them on price charts is of great importance.
What are Support and Resistance Levels?
When trading ranges form in markets, prices are influenced by various factors that cause fluctuations either upwards or downwards. These fluctuations greatly affect the behavior of buyers and sellers, sometimes indicating an increase in buyers’ desire to purchase goods or services, and sometimes showing sellers’ increasing inclination to offer their goods or services for sale. The convergence of the inclinations of each of these two groups of traders leads to the formation of support or resistance levels, which we will learn more about below and understand what is meant by support and resistance levels.
What is Meant by Support Level?
When we talk about a support level, we don’t mean reaching a specific price or a specific number; rather, it refers to a range or scope of prices or assets that do not allow the price or value of a commodity or asset to decrease and prevent them from falling. Simply put, this phenomenon occurs when traders show a greater inclination to buy.
What is Meant by Resistance Level?
The resistance level arises completely in contrast to support levels; thus, resistance levels do not want prices to rise and welcome their decrease. In such situations, sellers engage in more activity and show a greater interest in selling. Generally, a resistance level occurs when the selling phenomenon increases.
What are the Types of Support and Resistance Levels?
Analysts determine the level of support or resistance based on price charts and the fluctuations indicated on them. By considering hypothetical lines and connecting them to the ceiling and floor points of prices, they can indicate the boundaries and scope of market support or resistance, which are called support or resistance lines and fall into two main categories: static and dynamic.
Static Levels:
Static levels refer to price ranges that are horizontally observable on the chart. When ceiling or floor points of prices in this range are connected, we will see the formation of this level, which will have higher credibility if there is an effective and appropriate reaction to the price.
Dynamic Levels:
Dynamic price ranges or levels can also be referred to as dynamic or trend lines. These are seen as sloping lines on the charts formed in response to price increases or decreases and are visible in upward or downward trends. Their desirable and effective reactions to price changes indicate their high credibility.
How Credible are Support and Resistance Levels?
Understanding what support and resistance levels are helps us to grasp their credibility and importance in important economic and investment decisions. One important question in this regard is: to what extent can these lines or levels be trusted, or to put it simply, how credible are they?
In response to this question, it should be emphasized that the credibility of support and resistance levels depends on various factors and factors, which we will identify below:
Reaction to Prices:
As it is clear from the previous explanations, we are talking about a range and level rather than a specific number. When lines are drawn on the chart, the degree of contact with prices is completely evident and apparent. The more this contact level is, the more it indicates a greater reaction of the level to prices, demonstrating their higher credibility.
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Time Frame
Another factor that highlights the credibility of support and resistance lines is their Time Frame. As the name suggests, we focus here on the relationship between time and these levels. In fact, one should consider the time frame in which support and resistance levels have formed, whether they should be evaluated in the long term or if they are meaningful in the mid-term.
Slope of Range or Range
The third factor that affects the credibility of desired levels is their slope. The steep slope of support or resistance lines can indicate high market pressure or excessive trader excitement, which should be considered as a warning sign and the possibility of failure should be taken into account. Experienced individuals know that the closer the slope is to the horizontal level, the better and more reliable the market becomes, allowing for easier and more relaxed trading, as trader pressure and excitement decrease, making prices more realistic and formed levels more credible.
Conversion of Support and Resistance Levels
An interesting point about the types of support or resistance levels in the market is that they can convert into each other under different conditions and change their roles. When a range breaks and its direction changes, the positions of the upper levels change with each other. When we look at the chart in such conditions, we will clearly see that the range that had previously appeared as supportive is now taking on a resistance role, and the previous resistance range prefers to support prices.
Application of Support and Resistance Levels
Understanding what support and resistance levels are and what types they have is not enough to profit from market trends; rather, you must also understand their application, which you will become familiar with through the following explanations.
Assisting in Trading
One of the common and reliable methods for trading in financial markets and making profits is to use these levels, which can help you enter buying or selling assets by receiving signals and indications from them. This is done in two general ways.
First Method: Trading with Market Levels
In the first method, individuals wait for the price to decrease or increase and approach the support or resistance level, and at the right time, they open their trading position to profit from the price drop or rise.
Second Method: Trading with Market Levels
The second method comes into play when support or resistance areas are broken, as these conditions indicate the possibility of a significant upward or downward trend or an emotional market event that may occur. To open a buying or selling position in such conditions, one must first wait for the previous level to be broken and the price path to be established, and then proceed with the trade. This move is made by observing the Pullback, which refers to the price returning to the broken level.
Note
The important point is that events do not always happen so simply; sometimes the strength of the market trend and the advancement of prices take shape in such a way that even with the breaking of the level, no Pullback occurs, and the market continues on its path, indicating that the breaking power was not strong enough and a non-real or Fake Breakout occurred.
Conclusion
One of the common and important trading methods in financial markets is to use support or resistance levels against prices, which requires first fully understanding what support and resistance levels are and what types and applications they have. These levels form in times when trader tendencies to buy or sell assets increase.