It’s important to be able to identify Support and Resistance.
Support acts as a floor preventing further downward movement.
Resistance acts as a ceiling preventing further upward movement.
Price movement relies on supply and demand:
- Prices rise because of buyers and continue to rise until we run out of buyers, or until the supply is sufficient enough to absorb all the demand.
- Prices fall because of sellers and continue to fall until we run out of sellers, or until the demand is sufficient enough to absorb all the supply.
Areas of support and resistance are created by the decisions of market participants working in an uncertain environment.
Decisions to buy or sell are made by comparing the current price against previous price zones that caused traders to experience significant emotional response, especially opportune areas that traders feel a fear of missing out (FOMO), or areas where traders are trapped in losing positions.
Support and resistance do not always stop at an exact price, it’s an area or a zone where traders are making decisions.
Remember that price may reverse right before a support or resistance line; and that a break of that price does not constitute the break of the zone.