You've probably heard about the supply and demand trading strategy if you're intrigued by trading. This concept is among the most fundamental in technical analysis, helping traders understand price changes and identify the ideal times to enter or exit a trade. Let's examine what resistance and support are, how they function, and why they are essential.
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Support is a price level where a downtrend, a period of decreasing prices, can pause due to a concentration of demand. Usually, when prices are declining, there is greater supply (selling pressure) than demand (buying interest). However, if costs decrease, they may become more attractive to prospective buyers. Prices eventually reach a level where demand is strong enough to reverse the downward trend. This stage is known as support.
Think of support as the floor under the price. It's the level where buyers step in, believing the price is low enough to be worth buying. Sometimes, support is a specific price, but it can also be a price zone—a range where buying interest is strong enough to prevent further declines.
Resistance is the exact opposite of support. It is the price level at which bullish momentum can stop, slow down, or reverse. Resistance marks the price level at which more sellers start to appear and potentially dominate the strength of the buyers.
Another implication of resistance is that it is the price at which several buyers might think they have already captured the majority of the bullish move and might start closing their positions. This leads to a reduction in the number of overall buyers in the market and, consequently, a reduction in bullish momentum.
The basic economic principles of supply and demand trading are the foundation from which support and resistance are derived. When demand exceeds supply, prices rise; conversely, when supply exceeds demand, prices drop.
Support is usually the level at which the price is deemed too low, thus increasing demand and decreasing supply. Similarly, resistance is the level at which the price is deemed too high, thus increasing supply and decreasing demand.
Understanding the market sentiment behind the supply and demand of the security being traded will prove to be a huge boon when it comes to trading.
The methods of finding support and resistance levels can be seen as an art form. Essentially, traders mark spots on the chart where price action has previously stopped, slowed down, or reversed during either an uptrend or a downtrend.
The more recent these levels of support or resistance have come into play, the better they are as indicators of price action. If the price has recently obeyed the levels of support and resistance, then the likelihood of it obeying the same level once again is higher.
Support and resistance levels can be found across several timeframes, from as short as a 1-minute timeframe to as long as a weekly timeframe. However, it is important to keep in mind that the longer the timeframe, the more powerful and trustworthy the levels of support and resistance are.
A trader should remember that support and resistance levels are not exact in the sense that traders should not wait for the price to exactly hit these levels and then immediately be bullish when the trend has been bearish thus far. Price can sometimes break past a level of resistance, indicating a bullish continuation, only to reverse shortly after. In this sense, a trader should be flexible and not rigid in their understanding and implementation of support and resistance.
A good practice is to think of these levels of support and resistance as zones or areas rather than a strict line representing an exact price. Mastering this is key to perfecting the supply and demand trading strategy.
Axe Trader promotes methods that have stood the test of time and proven themselves as reliable and consistent. Nearly every single profitable and successful trader has used support and resistance levels in some way, shape, or form. Support and resistance levels are based on core economic principles, which can act as an added level of confidence in their merit.
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