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Support and Resistance Levels

This is one of the most widely used concepts in stocks trading and it refers to levels on a stock chart that tend to act as barriers that prevent the stocks price of an asset from getting pushed beyond a certain point in a particular direction.



Support

This level prevents the stocks price of an asset from getting pushed downwards and therefore it is regarded as the floor because it prevents the stocks trading market from moving downwards past a certain point.


Example:

On the stocks trading example explained below you can see that stocks price moved down until it hit a support


Once stocks price hit this level it slightly bounced back up, then resumed going down until it hit the support again.


This process of hitting a level and bouncing back is called testing the support.


The more times a support is tested and the stocks trading market bounces up the stronger it is - the stocks trading example explained below this level was tested three times without breaking. Finally the stocks trading market stock trend reversed and started moving in the opposite direction.


Once this level has been determined traders use it to place their stock orders to buy stock at the same time putting a stop loss a few pips below it.

Support level on a stock chart


In the stocks trading example above the stocks trading market did not move below this area. It is an area where stocks price cannot break lower.


These regions form good points where stocks price trend in a downward stock trend is likely to reverse and get support and start moving upwards.

The demand to buy stock at this point will be greater and therefore providing a good point to start a buy stock trade, while placing stops some pips just below.


This support is also use by short stock sellers as a target where to set their take profit for their short sell stocks trades.


This is another reason why the stock trend is likely to reverse or consolidate at this level because once the sellers close their sell stocks trades then momentum of the downward stock trend reduces and a consolidation will happen after which the direction is likely to reverse.


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Resistance

This level prevents the stocks price of an asset from getting pushed upwards these levels are therefore regarded as the ceiling because these levels prevent the stocks trading market from moving upwards


Example:

On the stocks trading example explained below you can see that stocks price moved up until it hit a resistance.


Once stocks price hit this level it retraced slightly the resumed going up until it hit the resistance again.


The resistance holds and is tested five times without breaking.


The more times a resistance is tested the stronger the it is.


Once this level has been determined traders put their stock orders to sell at this level and at the same time putting a stop loss a few pips above it.

Resistance levels on a stock chart


In the stocks trading example above the stocks trading market did not move above this area. This region shows an area where stocks price cannot break above.


These levels form good points where a stock price in an upward stock trend is likely to reverse after some resistance and start moving downwards in the opposite direction.


This shows that the demand to sell stock at this region will be greater and therefore providing a good point to start a sell stock trade, while placing stops some pips just above this level.


This resistance is also used by buyers as a target where to set their take profit for their bullish trades. T


his is another reason why the stock trend is likely to reverse or consolidate at this level because once the buyers close their sell stocks trades then momentum of the upward stock trend reduces and a consolidation will happen after which the direction is likely to reverse and start moving down.

 

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