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March 22, 2018

Question:What are Support & Resistance levels? and How are they created on a price chart?

Answer:

The Foundation of technical analysis rests and identify support and resistance levels.

Support and resistance are like the floor and ceiling that restrict the price movement from above and below.

Support levels

 

A support level is a price level at which the asset tends to start moving downwards and then reverses direction and starts moving back up.

The support level is represented in the diagram by a horizontal or near horizontal line that connects several troughs.

The more troughs on the same price level, stronger the support level.

Usually when they break out of the strong support level occurs that trend reversal can be expected. with the price continues to move in the direction of the trend.

Support levels are created in the following cases.

  1. Traders decide that the current price is attractive for opening a new Long trade.
  2. Traders decide that the current price is attractive for increasing the size of an existing trade.
  3. Traders who sold the asset decide that the current price is attractive for realizing their profit.

Resistance Levels

A resistance level is a price level at which the asset tends to start moving upwards and then reverses direction and starts moving back down.

The resistance level is represented in the diagram by a horizontal or near horizontal line that connects several peaks.

The more peaks in the same price level the stronger the resistance level.

The stronger the resistance level, the stronger the breakout will likely be when the price eventually does breakthrough the resistance line.

A start of a breakout is an excellent points to enter a trade.

Resistance levels are created in the following situations.

  1. Traders decides that the current price is attractive for opening a new short trade.
  2. Traders decide that the current price is attractive for increasing the size of an existing trade.
  3. Traders who bought the asset decide that the current prices attractive for realizing their profits.

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