Support And Resistance 2022 Key Strategies Explained

Februari 3, 2023Januari 26, 2023 falma.u99 explained, resistance, strategies, support

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Do you know exactly when to buy and exactly when to sell?

Of course not. If you did, you’d be richer than Mansa Musa. But nobody has managed to do that in the history of humanity.

We all want to see our portfolios increase but the markets are very confusing, even for the most math-savvy of us. Determining when to buy and sell can easily turn into a guessing game. 🎲

However, using support and resistance levels can significantly simplify this guessing game.

Looking at a price chart, you can never really know whether a price will go up or down, or by how much. Nonetheless, it is possible to map out an area the price will likely move within—by determining the support and resistance levels. Even if you can’t see the fish, you can catch it if you know the pond it’s in. Just be patient and rational, it might not always bite when you want it to.

As the job market rises thanks to vaccine rollouts, more and more people may invest in the stock market as they once again have disposable income. This guide will help you understand everything you need to know about support and resistance lines—thus laying the foundation for a profitable turn on the forex and stock markets of the world.

Ready? Let’s get to it!

* Support and Resistance 101
* Charting Support and Resistance
* How to Spot Broken Levels
* When Roles are Reversed
* Trendlines Explained
* How to Know if a Zone is Reliable
* Trading Decision Tips
* Psychology of Support and Resistance
* Using Support and Resistance
* Get Started with a Stock Broker

What are Support and Resistance Levels? 💡
Support and resistance are probably the two of the most important concepts in stock market trading. Understanding them is crucial for reading stock charts and making sound investment decisions.

Basically, support and resistance each refer to a barrier on a stock’s price chart. Namely, a stock’s price is unlikely to go past its support and resistance levels—it will usually hover somewhere between them. While this may seem like a basic concept at first, there are many layers to understanding support and resistance, and many ways you can use this knowledge.

Support Defined 📖
We’ve all seen these wiggly charts that kind of look like Pinocchio taking a lie detector test. These charts don’t just keep wooden dolls from becoming a real boy—they track a stock’s performance over time.

Now, look at the chart a little closer. See how there are these low points that the wiggly line doesn’t go past? We’ve drawn arrows to help you find them. Those low points are the support.

Support levels indicated by a support line. Image by TradingView.The stock is unlikely to go below those support levels. It’s clear from the market that demand is strong enough to keep the stock price at least at that level.

Basically, when the stock price goes down toward that level, it then becomes appealing enough for people to buy it—new demand is created thanks to the lower price. This causes the price to go back up again.

Resistance Defined 📘
Remember our definition of support from five seconds ago? Well, resistance is the opposite of that. There, you’ve mastered both!

Just kidding. We’ll go into a little more detail here as well. Let’s look at another stock chart. See the high points, where we’ve put the little arrows? This is your resistance level.

Resistance levels indicated by a resistance line. Image by TradingView.At support levels, the stock gets cheap enough that demand increases, and more people buy, raising its price. At resistance levels, the stock gets expensive enough that selling it is just too juicy, and investors begin to sell, driving the price back down.

How to Draw Support and Resistance 🎨
When you’re considering a stock, you need to identify its support and resistance levels. Many of the top brokers for stock trading will have built-in charting software that will make this easy for you. But, we’ll teach you the analog way just in case.

Choose a time frame, and look at a stock’s price fluctuation. If you’re a day trader, you might want to look at a smaller time frame because you’ll be turning the stock over fairly quickly. If you’re considering a longer-term investment and just want to get in at the right time within the current market, then you might want to look at a chart that covers weeks or months.

You’ll likely see that the stock has consistent low points, and consistent high points. If the low points consistently get higher, that’s a trend line—we’ll talk about that later. For now, let’s assume the lows and highs are consistent. Draw a line across them, and you’ve got your support and resistance lines.

Resistance and support levels indicate the area within which the price will likely move. Image by TradingView. How to Draw Support and Resistance Zones 🔎
Now that you have your support and resistance lines, you know that the price will fluctuate between them. If you want to minimize your risk, you can make a narrower trading zone around your support and resistance lines. This means buying when it is in the “support zone” rather than waiting until it hits the actual support line, or selling when it is in the “resistance zone.”

Now you might be thinking: why would I buy when it’s higher, and sell when it’s lower? You might have the risk tolerance to wait until you hit your levels exactly because this does give you fewer potential gains. But, it also lowers your risk of missing out on a trade.

How to Know if Support or Resistance Has Been Broken 💔
Support is not set in stone. Sometimes a stock won’t have new demand even when its price falls, and it hits new lows. Those new lows become the new support level. This might be due to an overall change in the market, an issue with the sector the stock is in, or something specific to the company, like a change in CEO or a poor earnings report.

Anybody remember Pets.com? No, because their stock spectacularly tanked after the dot-com bubble burst. You can see the support lines were not there to save it from this crash.

National news can affect independent stocks: investors are currently threatened by potential higher interest rates, so it’s possible that stocks could dip temporarily if rates like this were announced. Support offers a guide for typical market conditions within a specific time frame—it’s not a crystal ball.

And, you guessed it—resistance levels are not a crystal ball either! Sometimes a company announces a product that sounds so great, their stock bursts through the resistance levels to new highs.

Ultimately, this is what we all dream about: to somehow be the guy who buys a ton of shares of Apple the day before they announce the iPod. Or, you know, the 2021 equivalent of that. A similar example might be keeping an eye on news like Tesla’s quarterly earning reports.

Some stocks like AAPL have had rapid growth that is hard to predict. Image by TradingView. Besides that, a rising tide lifts all boats! We may begin to see an uptick in the market overall, as promising job numbers are leading to a higher appetite for risk in the forex market, which could boost activity overall.

You may want to set your trading strategy based on whether support and resistance have been broken. That’s not a bad idea—but you can’t always know for sure when support or resistance are broken.

Some might say that any stock trade outside of these levels counts as breaking them. But, others might want to wait for the stock to spend more time at its new levels to show that this is not just an anomaly like we see in the chart below:

Example of a false breakout. Image by TradingView.This is called a “false breakout.” If you think of support and resistance more as “zones” than as distinct lines as we discussed above, that will help you avoid making decisions based on false breakouts.

What to Do When Support and Resistance Reverse Roles 🔄
Securities change value all the time. That’s what makes day trading profitable in the first place. Sometimes, a security can grow and its former resistance line can become the future support line—or vice versa. Look at the chart below.

How the support level can become a future resistance level in a downtrending asset. Image by TradingView.Here you can see that the support lines on the stock’s way up become the resistance lines on its way down. Often, this happens after a break of support or resistance: in this case, the stock reaches a new high (breaking its resistance level) before it starts moving downward.

These events are often motivated by some kind of news that is motivating traders to buy or sell in larger volumes than before. There’s usually an increase in trading volume around this time, too.

To save money on incidents like this, make sure you are tracking your stocks and staying on top of world events. In the above example, the trader could have sold when the resistance level was broken, and thus avoided losing money on the downturn.

Support and Resistance Trendlines 📈
Sometimes, securities periodically fluctuate in price, but on a constant uptrend or downtrend. We may see this due to market fluctuations: while things are on the upswing right now, some experts fear that we will see the same downturns experienced by the US economy after the Spanish Flu in the 1920s.

When a security is trending upward or downward, support and resistance works differently, and it is even more important to do right. For example, if you buy during a downtrend because you think the price will go up temporarily, you’ll lose money if you’re wrong. However, if you miss the best opportunity to sell during an uptrend, you’ll just need to wait a bit longer before you can sell at a profit.

Let’s look at an uptrending security, for a more cheerful example:

Support levels on an uptrending price. Image by TradingView.In the above example, support levels are determined by how close they are to the trend line. So you’re not drawing a straight line across consistent support levels anymore—instead, you’re analyzing the stock’s price based on this diagonal line.

This could be a shift in the security, or in the market as a whole. For example, the currency market in March 2021 was on an upswing because retail forex traders deposited more than they withdrew in February, indicating more activity in the market.

If the security is trending downward, you would look for the series of declining peaks, and create a trendline across those. This would help you establish your resistance lines. You can then decide when to buy or sell, or even open a short position.

How to Know if a Zone is Reliable 🕵️‍♀️
In theory, the price of a security will stay in the zone between the resistance and support lines. But as we’ve already seen, that might not be the case. Don’t worry—there are a few ways that you can predict whether the price is going to stay in a certain zone.

Touching the Lines 🤏
Look at how often your stock is touching its support or resistance lines. The more frequently it touches those lines, the more significant the level is. That’s because more buyers and sellers see these as the support and resistance lines, so in turn, they make decisions based on them. It’s kind of a self-fulfilling prophecy.

Trading Volume 📊
Check out the trading volume at each price level. If a lot of trading activity is happening at the support and resistance levels, that means they’re going to be pretty reliable. Again, you’re seeing that a lot of investors are treating these as buy and sell points, which means they will likely continue to do so.

Price Moves 💸
Watch the security’s speed in moving up and down. The faster it comes up, the more impactful its resistance line might be. If it has a steady, slow climb, it may be able to break through the resistance level more reliably. This is because a slow climb is less likely to attract trading attention than a sudden skyrocket.

Time Spent in Zones ⏱
And finally, the longer these support and resistance lines have held for a given stock, the more likely they will continue to hold. Inertia, works on prices just as it does on swings.

Trading Decision Tips ✅
There are a few more tricks of the trade you need before you can start trading stocks based on support and resistance levels. We know you’re raring to get out there, but stick around and finish your lesson so you don’t implode like the Archegos Capital—the hedge fund that self-destructed because of careless, overleveraged trades.

Major and Minor Support and Resistance👇
You might find some baby support and resistance levels in your trading charts. Look at a 1-minute chart like the one below, and you can see major and minor support and resistance lines.

Minor support and resistance in a 1-hour time frame. Image by TradingView.You see how there’s a low, and then the price goes up just a bit, and then it drops again? We call that a minor support area. Yes, the security got stuck there for a hot second, but it was on a downward trend and quickly broke through that level.

If you’re a trader that practices scalping forex, these might be of some use to you. But really, you don’t want to get too fixated on a minor support or resistance line. Instead, look at the larger trends so you can make the most impactful trades.

Helpful Support and Resistance Indicators 🤝
It’s very important to identify your support and resistance lines correctly. As we prepare for unknown market conditions following the COVID-19 pandemic, it’s important to hang onto tried and true methods of making trading decisions. There are a few additional indicators of support and resistance that you should know about.

Moving Averages ⚖️
A moving average is like a trend line, but more wobbly. Basically, you can use it to connect your support and resistance zones, and you don’t even have to draw it yourself—most trading apps have automatic indicators you can just activate to get this info.

Example of a moving average in forex. Image by TradingView.On an uptrend, the moving average should touch your support lines. On a downtrend, it should touch your resistance lines. You can then make decisions based on the price’s proximity to your moving average.

Fibonacci Retracement and Extension ➗
That’s a lot of big words in that title! Don’t worry, we’ll keep this short. The Fibonacci retracement just takes strong supply and demand into account when determining support and resistance zones.

It’s based on Fibonacci numbers, which are kind of like the Harry Potter of the math world. We’re going to save that deep dive for another day—but for now, just know that Fibonacci retracement can help predict when humans will buy or sell their stocks. Again, you can just activate the Fibonacci indicator in your trading platform and it will give you an idea where the support and resistance lines will be in the future.

Pivot Points 📅
For day traders, knowing yesterday’s support and resistance lines can be extremely helpful. You might want to have these handy as you watch a security fluctuate throughout the day, and use them as quick benchmarks.

The Psychology of Support and Resistance 🧠
The stock market might seem like a bunch of numbers and charts made by robots, but really it’s driven by humans (for now… 🤖). That means that psychology plays a huge role because a stock’s price is just determined by the thoughts of a whole bunch of investors.

For example, support and resistance levels might not move past certain round numbers, like $100 per share. Why? Simply because many traders are more likely to buy or sell at a nice, round number, and many stop orders and target prices are set at round numbers.

There’s also just general psychology of demand. Imagine you bought a share for $20, and it goes up to $25. Woo! Now, you might say to yourself, “If it goes back down to $20, I’ll buy more.” Well, my friend, you’ve just created demand at the $20—which means you’ve created a support level.

This is true for other kinds of buyers as well. Maybe your aunt saw your purchase, so she’s also decided that if it goes back down to $20, she’ll buy. Maybe your grandma (it’s nice that you all trade stocks together) was the smartest of the bunch and bought at $15, but she sold at $20 before it hit $25. Now she’s taken a holy vow to buy back her stock if it hits $20 again.

So now you have this whole group of people ready to buy at $20 a share—except it’s not just your family, it’s thousands of investors. That’s not even counting the status quo factor: some people who see that the support level is $20, so they’re going to buy it at $20, keeping the support level at $20.

In Summary: How Support and Resistance are Used 🛠
You can use support and resistance lines to decide where to open and close a trade. If you’re looking to get in, you want to buy shares at their lowest price point for this market—that’s its support level. Similarly, you want to sell at the highest price point for this market—that’s the resistance level.

Many platforms allow you to draw these lines in an interactive chart. Then, you can place orders to trigger your trades automatically once the target price has been reached. This way, you don’t have to stare at a stock ticker all day—you can go live your life, while your platform automatically sells your shares when they hit the resistance zone!

Now, young grasshopper, you are ready to go forth and trade your little heart out using support and resistance lines. Whether you’re trading stocks, bonds, or are from a country where forex is one of the more reliable sources of income, support and resistance can help you make the best decisions.

Support and Resistance Levels: FAQs
* Do Support and Resistance Really Work?
Yes, support and resistance zones can help you predict the best time to buy or sell within stable market conditions. However, they can be broken—it’s not a crystal ball.

* Why Can Support Become Resistance?
On a downturn, a price can break below a support level. That same price point can then become the resistance level if the security continues to trend downward.

* How Accurate Are Support and Resistance?
You can very accurately measure what a stock’s past support and resistance levels have been. Of course, no one can predict what a stock will do in the future—but past performance is a helpful indicator in stable market conditions.

* What Causes Resistance in Stocks?
Resistance is a ceiling that a security has a hard time breaking through. It is usually caused by heavy selling that happens at a certain price point.

* What Happens When a Stock Breaks Resistance or Support?
A stock breaking resistance or support means it has reached a new high or new low. It then sets a new resistance or support level.

Get Started with a Stock Broker
The most reliable stock brokers in the world will have charting software and tools available to help you identify support and resistance levels.

The following are a few brokers trusted by investors across the globe:

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