By: Montana Timpson
Support and resistance are powerful pillars in active trading, and many trading strategies are predicated on technical analyses of these statistical charting indicators. As one of the most widely followed technical analysis techniques, support and resistance can provide active traders with detailed insights into predictive price trends for the highest likelihood of profitable trades.
Support and Resistance as Measures of Technical Analysis
In stock market technical analysis, support and resistance are certain predetermined levels of the price of a security at which it is thought that the price will tend to stop and reverse. In short, support and resistance refer to price points beyond which a stock is not expected to fall or rise. Technical analysts use support and resistance levels — alongside associated statistical charting indicators like VWAP or Bollinger Bands — to identify price points on a chart where the probabilities favor a pause or reversal of a prevailing trend, identified by trend lines.
Support levels represent the lowest market price that a security tends to trade at, while resistance levels represent the highest price at which a security tends to trade. At the support point, a downtrend can be expected to pause due to a concentration of demand or buying interest; as the price of a security drops, demand for shares increases, and price is expected to rise again. In contrast, price is likely to trend downward again as share prices approach a security’s resistance point.
Proactive Versus Reactive Support and Resistance
Proactive support and resistance methods are based upon current price action, outlining areas where price has not yet been in an effort to predict future price action. Proactive support and resistance methods include benchmark measurements like trendlines, moving averages and VWAP, as aforementioned.
Reactive support and resistance, in juxtaposition, are formed directly as a result of price action or volume behavior. Reactive support and resistance methods include volume profiles, price swings and open-high-low-close (OHLC) charts.
Support and Resistance Trading Strategies
Support and resistance strategies can either be based on price respecting these levels, as is the case with range-bound strategies, or anticipating the break of support and resistance, in the form of breakout and pullback strategies.
By using support and resistance as measures of technical analysis, short-term traders can better determine which direction to trade and at which price level they should enter and exit their positions for the highest likelihood of profitable trades. However, support and resistance are just some of the many information points for predicting trends and developing trading styles, and other factors should be considered when speculating on the price of any given security. Price will not respect support and resistance forever. Bearing this in mind, active traders should adopt sound risk management to limit losses if there is a breakout.
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