Support and Resistance

Identifying Support and Resistance Levels

Support and resistance levels are key concepts in technical analysis, representing price levels where buying (support) and selling (resistance) pressures are concentrated. These levels are determined by previous price action and are used by traders to make trading decisions.

Example:

Imagine a stock consistently bounces off a certain price level, indicating strong buying interest whenever the price approaches that level. This level becomes a support level, providing a potential entry point for traders looking to buy.

Role Reversal

Support and resistance levels can reverse roles when broken. A former support level may act as resistance after it is breached, and vice versa. This phenomenon, known as role reversal, provides valuable insights into market dynamics.

Example:

If a stock price breaks below a key support level, that level may now act as resistance on any subsequent rally attempts. Traders often look for confirmation of this role reversal before entering short positions.

Importance in Trading Strategies

Support and resistance levels play a crucial role in formulating trading strategies. Breakouts above resistance or breakdowns below support can signal potential trend continuations or reversals, respectively.

Example:

A trader may employ a breakout strategy by entering a long position when the price breaks above a significant resistance level. This breakout could signal the beginning of a new uptrend, providing an opportunity for profit.