Monday, May 27, 2024

Support and Resistance

Support is a price level that acts as a “floor”, preventing the price from falling below that level.

Resistance is the opposite: a price level that acts as a “ceiling”; a barrier that prevents prices from rising.

Support and resistance levels are the natural result of the interaction of supply and demand in any market.

For example, increased demand for a stock will cause its price to rise, creating an upward trend.

But when the price rises to a certain level, traders take profits
Short sellers will enter the market and create “resistance”
further price increases.

The price may retrace from and rise to this resistance level multiple times, sometimes eventually breaking through it and continuing its previous
Trends, sometimes completely reverse.

Support and resistance should be viewed more as general price levels rather than precise prices.

For example, if EUR/USD drops to a low of 1.1010, bounces slightly, then drops again to 1.1010, then bounces again. A subsequent decline to 1.1000 would not violate the 1.1010 “support” level.

In this case, the fact that the stock retraced to the exact price level it had previously established is more of a coincidence than anything else.

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