2. The Secrets of Support & Resistance - hantecfx.com file2 HANTEC RESEARCH WEBINARS - TECHNICAl ANAlySIS SERIES 2. The Secrets of Support & Resistance Old support becomes new resistance,

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As can be seen in the above chart, support is the price level through which a price seldom falls (illustrated by the blue arrows), while resistance is the price level that a price seldom surpasses (illustrated by the red arrows).

These support and resistance levels are important in terms of market psychology, and are the graphical illustration of supply and demand. Supports are the levels at which a lot of traders are willing to buy, while resistances are thee levels at which traders are looking to sell.

Once these levels have been broken, the supply and demand and the psychology behind the price movement are thought to have shifted. Subsequently, new levels of support and resistance will be established.

What is support and resistance?

A key to technical analysis is the battle between the bulls and the bears. Or in other words the buyers (demand) and sellers (supply). In technical analysis, this is referred to as resistance and support levels.

When the price reaches a level where demand is outstripped by supply, the price rise will be stunted and there will be a ceiling or resistance in place, at which level the price begins to fall. On the other hand, when a falling price is met with increased demand at a level where there are more buyers than sellers, a floor is reached which acts as support, at which the price begins to rise again.

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2. The Secrets of Support & Resistance

Figure 1: Support and Resistance

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2. The Secrets of Support & Resistance

Old support becomes new resistance, and vice versa

Once a resistance or support level is broken, its role is reversed. If the price falls below a support level, that level will become resistance. If the price rises above a resistance level, it will become a basis of support.

As the price moves past a level of support or resistance, it is thought that supply and demand has shifted, causing the breached level to reverse its role. For a true reversal to occur, however, it is important that the price makes a strong move through either the support or resistance.

Often you will see a pullback to the breakout level, before continuing in the direction of the breakout.

How to trade Supports and Resistances

Support and resistance analysis is an important part of trends because it can be used to make trading decisions and identify when a trend is reversing.

For example, if a trader identifies an important level of resistance that has been tested several times but never broken, he/she may decide to take profits as the security moves toward this point as it is unlikely that it will move past this level.

The reverse can be true on a break of a key level. Many traders will trade in the direction of a breakout.

In the EURGBP example illustrated in the chart above, during December 2013, it was possible to continually have buy orders between £0.8320 and £0.8330, and taking a profit whenever EUR/GBP moved towards the top of the range around £0.8390.

However, once the key support at £0.8320 was breached, you would be looking to sell into strength, with the old £0.8320 support becoming the new resistance.

Figure 2: Old support becomes new resistance

Figure 4: Range trading using the Bollinger Bands on Silver

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