Friday, May 24, 2024

Resistance

A Resistance level is a concept in technical analysis that indicates when an asset reaches a price level that market participants are unwilling to continue buying, causing the price to stop rising.

Resistance is a price level at which upward movement may be limited by the accumulated supply of at or near that price level.

Resistance or resistance is the price level that prevents prices from rising due to an increasing number of sellers looking to sell at that price.

The closer the price gets to the resistance, the more sellers will be active.

Forex Support and Resistance Explained

When the price of an asset such as a stock or currency pair approaches a resistance level, it is usually considered a bearish (i.e. negative) signal.

As selling pressure increases

, traders expect prices to start falling

Resistance levels are often used in conjunction with support levels, which are points where traders are unwilling to let the price of an asset fall significantly.

Traders often identify areas of support and resistance in order to make trading decisions, including when to set stop losses and profit targets.

If an asset does break through a resistance level, some traders believe its price will continue to rise, or “bounce,” until a new resistance level is found.

Understanding resistance

The concept of

resistance originates from supply and demand.

When an asset price approaches a resistance level, it is often interpreted as a signal that selling pressure (supply) is overcoming buying pressure (demand) in the market.

This dynamic makes resistance levels a key point in predicting potential price movements.

Resistance

To better understand resistance, let us consider an example.

Suppose a stock reaches a price of $100 multiple times over the course of several months, but each time it rises to that price, it subsequently falls back.

In this case, the $100 mark is seen as a resistance level for the stock. Traders may interpret this recurring pattern as a signal to sell the stock when the price approaches $100, expecting the stock to drop again based on past behavior.

If you trade the Forex market, consider the EUR/USD currency pair.

Assume that every time the currency pair reaches the level of 1.2000, it will start to fall back. In this case, 1.2000 is considered resistance.

Forex traders may interpret this recurring pattern as a signal to sell the euro when the price approaches 1.2000, anticipating a drop in price based on past behavior.

The meaning of fracture resistance

A key aspect of the

resistance level is the potential for “ to break through ”.

If an asset price successfully breaks above an established resistance level, it is usually considered a bullish (positive) signal.

The assumption here is that buying pressure is enough to overcome selling pressure, which could result in a significant price increase.

However, for a breakout to be confirmed, the price must not only break through the resistance level, but it must also sustain the rise with significant volume Volume .

In this case, the old resistance level may become the new support level, which is the price floor at which the asset price tends to stop falling and start rising.

Continuing with our EUR/USD example, a breakout will be considered if the price of this pair breaks above the 1.2000 resistance level and remains there with sufficient trading volume.

This may indicate that the pair may continue to rise.

After a breakout, the old resistance level (1.2000 in our example) can often turn into a new support level.

Possible, but not decisive

While resistance levels can be a valuable tool in a trader’s arsenal, it’s important to remember that they are possibilities and are not foolproof.

Prices may sometimes move opposite to expectations due to a variety of factors, including changes in market sentiment, economic data releases, geopolitical events, or corporate news.

Additionally, resistance is more of a area than an exact price level.

The price of an

asset may fluctuate around a resistance level before reversing or breaking out, which is why many traders prefer to think of resistance as a price range rather than a precise point.

Resistance levels are an important part of a trader’s toolkit, providing insightful clues to market behavior.

However, as with any tool, they are most effective when used in conjunction with other technical analysis tools, a deep understanding of fundamental analysis, and a sound risk management strategy.

If you want to learn more foreign exchange trading knowledge, please click: Trading Education.

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