What are support and resistance lines?
What are support and resistance (lines)?
SUPPORT [U noun] and RESISTANCE [U/C noun] are the lowest and the highest price levels of an asset in one period, typically in direct correlation with the market’s supply and demand.
- A support line shows where the asset’s price drop is expected to pause due to the increased demand (more people buy at a lower price).
- A resistance line shows where the asset’s price jump is expected to pause due to the increased supply (more people sell at a higher price).
Used in a sentence: ‘’Simply put – the support level is equivalent to the asset’s price floor, and the resistance level is equivalent to the asset’s price ceiling.’’
Facts to remember:
- Support and resistance are typically in direct correlation with the market’s supply and demand
- It is possible for support and resistance lines to break
- Psychology is the key element to keep support and resistance lines impenetrable
In spite of being the fundamental components of technical analysis, support and resistance lines ultimately rest on human psychology. Traders and investors have a vast influence on market fluctuations on a daily basis, and their reactions and moves continually change the market’s landscape. That is precisely why support and resistance lines can break, or even convert – i.e. a support line can also become a resistance line due to the immense price movements.
When it comes to indicators that help in identifying support and resistance levels, traders use many. One of the most popular choices is the Fibonacci retracement tool, which indicates the retracement levels of 23.6%, 38.2%, 61.8%, and 78.6%, coming from the Golden Ratio theory. Naturally, this tool can be used to calculate the support and resistance lines in any market.
Though at first glance simple, the concept of support and resistance is much more challenging to determine in ‘real-life situations’. Nonetheless, every market has its own logic and common behaviors. Therefore, a certain level of prediction is possible if your due diligence is thorough and your approach tactful.
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Disclaimer: The information provided in this post is not legal, accounting, or financial advice. I am not a lawyer, accountant, or financial advisor. I am not registered as an investment adviser with any federal or state regulatory agency. The Information should not be construed as investment or trading advice and is not meant to be a solicitation or recommendation to buy, sell, or hold any cryptocurrencies.