Understanding support and resistance

Understanding support and resistance

You might have heard the terms support and resistance before. Support and resistance form fundamental aspects of the financial markets and are highlighted at the very early stages of a trader’s career.

 

Support and resistance areas are prices or zones of prices that indicate excess supply or excess demand. They are called areas or zones as demand or supply do not come in at one single level and instead, are spread out over a range of prices.

 

Let’s start by looking at an example of a support area on the Dow Jones Industrial Average Index (Figure 1):

Figure 1

 

In the example, you can see two rectangles where price each time paused and reversed higher. The first time might have been some profit taking action, leading to a short term reversal while the second instance led to a broader and bigger move in the opposite direction. Support zones indicate demand, either in the form of traders squaring some old positions or full-on demand and initiated positions.

 

Let’s look at an area of resistance (Figure 2):

 

Figure 2

 

You can see the first rectangle helped pause the ascent for a bit but then the trend resumed only to stop on a bigger area of resistance, one that showed price failing multiple times. If you notice, the two rectangles are relatively close in terms of price which indicates that the entire area is exhibiting increased supply, enough to stop the advance of the uptrend.

 

Support and resistance zones not only help you determine when the market may reverse in the future but it can also tell you what to expect in case an area is overcome. For example, the area of resistance above is capping prices but in the event a surge of demand comes in and forces price higher, the market could see further upside as those traders who are short are now caught in the negative, forcing them to reverse positions and create even more demand on the buy side.

 

Integrate supply and demand into your daily analysis or trading strategy as it helps you pinpoint areas where you can place your stop loss or take profit orders. Keep in mind that support and resistance zones are not perfect and a certain market may reverse before reaching one while other times may see price briefly pushing through resistance or support only to reverse to the other side, effectively creating a fake breakout.

 

With CFI, you can trade thousands of CFDs on Stocks, Forex, Commodities, Indices, and ETFs from one single platform. If you are new to the financial markets, you can start with a risk-free demo account and for the more seasoned traders, opening a real account is a straightforward process that requires very little time. CFI offers its clients many services and features including free daily webinars, dedicated account managers, daily technical reports, and highly competitive conditions that include fast execution and spreads from zero pips.

 

Click here to find out more.

 

The content present in this article reflects the opinions and views of the author and does not necessarily reflect the position of CFI. The material published on this blog is provided for informational purposes only and should not be considered as investment advice. The Company is not responsible for the decisions and choices of the investor who has full and free will to make decisions that they see appropriate upon the investor’s sole discretion.

Credit Financier Invest (Mauritius) Ltd is an award winning global financial markets provider with over 23 years of experience and regulated entities in several jurisdictions, focused on offering impeccable execution and trading conditions including very low spreads, professional services, dedicated support and powerful tools.
Credit Financier Invest (Mauritius) Ltd has regulated subsidiaries in
London • Larnaca • Beirut • Amman • Dubai • Port Louis
Credit Financier Invest

Important Disclaimer:


We would like to remind that while we endeavour to provide best possible services, CFI provides execution only services and any information, reports, opinions, commentary or other materials he receives from CFI directly or from its employees or through any analytical tools provided to him or third party research provided to him from the Company shall not be deemed as investment advice and it cannot be relied upon to make investment decisions. The Client commits to make his own research and from external sources as well to make any investment. The Client accepts that CFI will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. The contents of any report provided should not be construed as an express or implied promise, as a guarantee or implication that clients will profit from the strategies herein, or as a guarantee that losses in connection therewith can, or will be limited.


Forex and CFDs are leveraged products that incur a high level of risk and a small adverse market movement may expose the client to lose the entire invested capital. The vast majority of retail client accounts lose money when trading in CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. The possibility exists that you could sustain a loss in excess of your deposited funds even if a stop loss is used and therefore, you should not speculate with capital that you cannot afford to lose and be aware of trading risks. Credit Financier Invest (Mauritius) Ltd provides general information that does not take into account your objectives, financial situation or needs. The content of this website must not be interpreted as personal advice. Please ensure that you understand the risks involved and seek independent advice if necessary.

niss
forme
The Best Online Financial Trading Services, Middle East, 2020
Entrepreneur Magazine

Please publish modules in offcanvas position.