Support and Resistance is one of the most widely used concepts in Technical Analysis. Support and resistance represent key junctures where the forces of supply and demand meet. In the financial markets, prices are driven by excessive supply (down) and demand (up).
- As demand increases, prices advance and as supply increases, prices decline.
- When supply and demand are equal, prices move sideways as bulls and bears slug it out for control.
- A support line refers to that level beyond which a stock’s price will not fall. A resistance line refers to that line beyond which a stock’s price will not increase.Supply is synonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls and buying.
SUPPORT CONVERT INTO RESISTANCE (Vice-Versa)
Support = Resistance: Another principle of technical analysis stipulates that support can turn into resistance and vice versa.
Once the price breaks below a support level, the broken support level can turn into resistance. The break of support signals that the forces of supply have overcome the forces of demand. Therefore, if the price returns to this level, there is likely to be an increase in supply, and hence resistance.
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While tracking the securities practically in live markets, sometimes you come across levels that put you in a dilemma that if that level is going to act as a support or resistance.
In such instances, you have to look for the candle formation considering the volume participation.
- For a Strong support to break, confirm the breakdown with a healthy bearish candle with volume
- For a Strong resistance to break, confirm the breakout with a healthy bullish candle with volume.
This is how you could avoid fake breakouts. Also, take 2-3 indicators in confluence to confirm the breakouts.
Retests are also a strong confirmation after a breakout or breakdown to enter a trade in the dominant direction of the wave.