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SUPPORT & RESISTANCE - FACT OR FICTION?
Since the turn of the 20th century, support and resistance has been employed by investors and traders around the world. The theory that the market can 'remember' old highs and old lows almost defies logic, yet it forms the foundation of the support and resistance approach. If you are new to this concept, take a look at this straightforward description on the ASX website. If you're already in the know, read on for a few tips to consider when practicing this method.
Follow the Lead-UpMany experts agree, the way in which the price approaches the critical area (of potential support or resistance) is more important than whether it actually penetrates or not. As price approaches, keep a close eye on market behaviour i.e. volume, daily ranges, and other indicators (moving averages for example). This will provide clues as to whether the potential levels will provide actual support or resistance. For example, if price approaches an old resistance level with small ranges, against decreasing volume, the probability that potential support becomes actual support increases.
One man's trash...It is vital to be aware that support and resistance levels exist, but as with any analytical techniques, also understand they will not play out perfectly every time. When price doesn't pierce through the expected level of support, or the market suddenly reverses without warning, this can ruin a new trader. For the astute analyst however, unanticipated market behaviour can present opportunities. For example, if a previous resistance level does not provide the anticipated support, the market is evidently weaker than first revealed.
Patience not prayersKeep in mind, price can be expected to meet resistance or support at numerous levels. So when you have identified an area of potential support or resistance, pause and analyse. Just because a support or resistance level is met or pierced, this does not guarantee price will continue as expected. Waiting for the market to play out a little further protects you from superimposing your own predictions and instead letting the market confirm it is actually meeting the expected support or resistance. Depending on the context of the market, there are various recommendations for what constitutes confirmation (i.e. a certain subsequent price action), so as always, conduct personal research and test strategies to find a method that works for you.
Additionally, collect that weight of evidence so if other indicators coincide with the levels, you can assume there is a higher likelihood the market is reacting to that support or resistance.
On the ChartsMost quality charting programs should have the ability to draw and identify support and resistance. Illustrating these levels on charts significantly improves your ability to visualise and analyse the patterns. For instance, EzyChart has two indicators that deal with support and resistance.
To apply in EzyChart, simply click on the Indicators tab, then select Indicators, then 'Support & Resistance' levels. When you choose these indicators, they will be applied with the default settings, so there is no need to alter any criteria unless you need to as part of your particular strategy.
First Published: 13 July 2018 - Copyright © Electronic Information Solutions Pty Ltd 1990 - . All Rights Reserved.
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