The concepts of support and resistance are two basic concepts in the world of trading. In fact, understanding them will help you understand the states and impulses of the markets in different periods of time. These concepts are part of the essential and elementary knowledge of technical analysis in trading.
For that reason, from Atani we will tell you everything you need to know about them, and how to take advantage of these concepts in our trading application.
What is support in trading?
First of all, we will start with the concept of support in trading. At this point, we can say that we are facing a support, when the price of an asset stops its decline to begin to rise or hold (between or above that price range).
This market action is directly related to the fact that there is more buying strength than selling strength. That is, more assets are bought than sold within the market. In this scenario, the bearish or bearish trend of the asset price is slow down and two options can begin:
- The price of the asset will start to rise (initiating a bullish trend).
- It will stay within a certain range (initiating a sideways trend).
To better understand this behavior, consider the following:
In a market or stock market, the fact that an asset has a low price is attractive to make investments. This is especially true if the asset in question has a strong presence at all levels. Therefore, investors take advantage of these times of low prices to buy assets. This has an impact on the price of the asset. This is a simple example of the law of demand and supply.
In this example, the low price of the asset is a support. That is, the point where the price of the asset is balanced and maintained for a long period of time. These support points are the favorite entry points for traders, especially those that occur in the “dips” or sharp declines in the price of an asset to reach a strong support in the price of the asset.
What is a resistance in trading?
When we talk about a resistance, we refer to the inverse case of support. That is to say, a resistance is when the price of the asset reaches a point where it cannot advance, because a greater selling force than buying force begins to be present. This situation leads to the end of the uptrend in the price of the asset and the price begins to decline, initiating a downtrend or sideways trend.
Understanding what happens at this point is simple. It is enough to imagine that investors are not interested in buying assets with a very high price. This decreases the demand for assets to a point where it is lower than the supply of assets. In fact, at this point the sale (or supply) of assets shoots up rapidly. The reason is that traders who started an early entry at a low price, upon seeing the increase in the value of the asset begin to sell to take their profits. All this leads to the end of the uptrend and the beginning of a bearish trend.
How are supports, resistances and trends related?
Now, the concepts of support and resistance are closely related in the trading world. First of all, on a market or chart graph we can observe price trends from what we call valleys and peaks. A valley refers to a space on the chart where prices begin to fall until they reach their low or support point. A peak, on the other hand, is formed when prices begin to rise until they reach their high or resistance point.
This leaves us with:
- We are facing an uptrend when we have a series of successively higher peaks and valleys. This means that an uptrend is formed by higher and higher support and resistance points.
- Conversely, we find a downtrend when we have a series of successively lower peaks and valleys. This means that a downtrend is formed by lower and lower points of support and resistance.
Support and resistance: their importance in trading
Trading in the markets may seem simple, but it is not. The changes that assets undergo second by second within the same, make it difficult for beginner traders to have a rather complex first moment. However, the concepts of support and resistance can be of great help when trading. Hence the importance of knowing and assimilating them in order to know how to put them into practice.
Support and resistance levels are usually very well marked and clearly visible on a price chart. In fact, it is common to see how the price of an asset “bounces” between a minimum and maximum price range. This gives us a clear and very quick idea of what is the support and resistance of the value of an asset in question. However, as traders we must keep in mind that these values can be exceeded at any time. Here there are no certainties or absolutes, but there are tools that help us to operate with a certain margin of safety.
Trading within these levels in well-defined time periods can help traders to make profits with a relatively low risk. Thus, advancing in new trading strategies will mean learning to handle this and other tools that help us to better predict the price behavior of an asset.
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