Support and resistance level mainly helps traders to understand the asset price movement depending on the market trend. These technical analysis tools are widely used by Forex traders . However, it is essential for different types of traders.
To understand properly, first, you need to know how asset price moves.
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In this article, you will find a short introduction with the necessity of support and resistance level. Let’s start with a simple definition.
What Is Support And Resistance Level
Support and resistance are the two levels of the price, at which the price will tend to stop or reverse in the Forex market. These levels are denoted by multiple touches of price without a breakthrough in the level.
These are also highlighted with angled lines called trend lines. Support occurs when falling price stops, changes direction, and begins to rise.
On the other hand, Resistance is the level, where the rising prices stop, change direction, and begin to fall. Moreover, you can easily assume these two terms.
The below information will give you a clear picture of these two trend analysis tools.
Support level can be described as the “floor” which is supporting or holding up prices where resistance level is the “celling” keeping prices from rising higher.
When the price breaks the support or resistance level, it continues to make another support/resistance level. It is a common scene in the Forex market.
Major Importance Of Support And Resistance Level
The necessity of these two levels is worth mentioning. Traders pay attention to these two levels as they highly influence the stock price.
Traders usually can buy at a support level and sell at a resistance level. The support level helps traders to predict when to take profit.
If he has been short where the resistance level, helps to predict the time to take profit if he has been long.
Furthermore, Support gives the traders an exact picture of what price levels should prop up the price in the event of a correction.
Conversely, predicting the resistance level can be helpful as the price level can be harmful for a long position, an area where investors possess a high consent to sell the security.
Moreover, these levels are essential for technical analysts. They use these levels to assume the price points where the probabilities favour a pause or a reversal of a prevailing trend on a treading chart.
The trendline helps to set apart a longer-term trend. And also trendline guides the direction to trade-in. Let’s discuss it with an example.
If the trend is down but still a range develops, then instead of buying at a range support preference should be given to a short-selling at range resistance.
Here, the downtrend let us know that going short has a better probability of producing a profit than buying.
If the trend is up and then a triangle pattern develops, favour buying near support of the triangle pattern.
Lastly, buying near support or selling near resistance can pay off, but there is no assurance that the support or resistance will hold.
Therefore, consider waiting for some confirmation that the market is still respecting that area.
Monday, February 17, 2020