Standard support and resistance
To properly introduce the concept of supply and demand, it is important to analyze a similar well-known notion: Support and Resistance. Many traders are using these support and resistance areas in their technical analysis as it plays a key role in their trading approach.
Support and resistance levels
support, or a support level, refers to the price level that an asset does not fall below for a period of time. An asset’s support level is created by buyers entering the market whenever the asset falls to a lower price.
resistance, or a resistance level, is the area where the price of an asset encounters upward pressure from the appearance of an increasing number of sellers who want to sell at that price. Lots of sell orders are being placed, which are pushing the price level lower or lower.
Once a price hits key support and resistance levels, traders look for an entry point or exit from their current trades, locking in their profits. The main reason is that at these levels, the price will either break the support/resistance area or bounce back.
In the image above, we can see that the price is constantly struggling to break the level around 0.99055. This level is considered a support as the price bounces every time this level is reached.
Support and resistance levels are not always static. They can be dynamic levels, in the form of trend lines, moving averages, price channels, etc. The principles remain the same as to where price is rejected and market buying or selling pressure is applied.
A trend is the general direction of an asset’s price. When performing technical analysis, trends are identified by lines that highlight when the price is making higher highs and higher lows for an uptrend, or lower lows and highs for a downtrend. These lines act as dynamic support and resistance and provide signals of when to enter or exit a trade.
For example, when a market is trending up, resistance can form when there is consistent profit-taking among buyers, who place sell orders to close out their long positions. This process leads to a pullback, forming a concluding high of the movement. However, when the price drops, buyers will look for opportunities to re-enter the market when the price reaches the support trendline.
All static and dynamic support and resistance levels can be drawn on different time frames. The longer the time period, the more important the level. Short-term traders can look at the M5-M15 price movements, but should also look at the higher levels of the H4 or Daily period, as these are of greater importance and can lead to more substantial buying or selling pressure from the market .
In the image above, the price action on the M15 timeframe represents a potential move higher supported by the M15 upper trend line. However, the resistance level in the H4 period acts as a great warning to enter with a buy position, as the selling pressure could be considerably greater upon reaching this level.
Disadvantages of using support and resistance
- Lose good trades or introduce bad ones. First of all, these levels should not be considered as lines, they should be viewed as areas. The price could break and recover several times around a specific line represented level, which leads to a lot of chaos. Second, placing limit orders around these levels can lead to entering a bad trade (when false breakouts occur that affect the pending order) or losing a good trade (if the order was placed too close to the level and the price returned before that level). clean it up)
- delayed signal. Using indicators like the moving average as dynamic support and resistance provides delayed feedback to traders. The underlying mathematical formula of this type of indicator shows that the calculated value is always behind the price, so it cannot be used to predict future movement.
Traditional support and resistance levels should always be used as confirmation signals, never as triggers to enter a trade. A proper analysis of key price levels should be done supply and demand techniques, which reveals the momentum of each price movement and helps us make the best trading decisions.
In the following posts I will continue to talk about supply and demand, how we can efficiently identify movements and apply all the knowledge to increase the advantage of the market.