"Support"- is when the price is low and at this point there are more buyers than sellers. This is the price at which buying volume will start to pick up because most of the traders agree that the level is low.
"Resistance"- is when the price is high and at this point there are more sellers than buyers. This is the price at which selling volume will start to pick up because most of the traders agree that this level is high.
Trading with support and resistance does not need mathematics but more of a common sense. This is my most favorite method in trading because you cannot go wrong here and is a very simple but reliable method. The only thing that will go wrong is your analysis. But support and resistance of prices will always be there, you just missed to spot it correctly.
Also you have to take note the behavior of support and resistance. This is because:
Rule #1: Once the support level is breached, which means prices continue to go downward, that support level will now become the new resistance level.
Rule #2: Once the resistance level is breached, which means prices continue to go upward, that resistance level will now become the new support level.
Lets analyze these two rules using a sample chart below:
The graph is a typical long term trading. It is because the x-axis are incremented with almost per year basis. These stock charts are very important because just looking at the graphs without the need of complex mathematical analysis, you can identify the areas of "support" and "resistance"
Say the time is June 2002. The price reached it lowest and we need to test the areas of support and resistance. We do not trade right away. This is what the analysis should be:
On August 2001, there is a price at 29.64 then it goes up to around 41.76. We can say 29.64 is the support 1 and 41.76 is the resistance 1. After that, it goes down since at the point of resistance there are more sellers than buyers until it reaches the point of 29.64 again. We might thought this is still the support, but it may be not this time. We need to test it first. At 29.64, it did not stay there for so long and came down. The test of support fails.So 29.64 is now the new resistance and we call it resistance 2. But we do not have data of the new support, we wait. Until now on June 2002, it reaches the lowest point at 20.55. Now traders think this price is now so low, so they start buying. And what happens?
It hesitates on that area for some time. This is the new support which we call support 2.This is a good time to trade "long". Trading long means, buying at a low price and selling it at a high price.
It also means buying at "support" areas and selling at "resistance" areas. When we buy at for example 23.58, and set the stop to 20.55. This is a good trading. Then what happens next is when it reaches again 29.64, we will sell it because it is the area of resistance. After that, we get some profits.
Although no trading system is perfect but identifying support and resistance areas needs practice. A good tip is to identify areas of "hesitation". This is the area where a violation of support and resistance will most likely to occur. Say we trade short at 29.64 and would like to buy it somewhere at 23.58. But 25.09 became areas of hesitation and you may consider buying at that point to avoid losses.
You can practice support and resistance areas by paper trading and looking at the current stock charts, monitor how accurate you can pinpoint support and resistance areas with analysis just like above, then you will be a great trader.:)
Other great info in support and resistance trading you visit here: Support and Resistance Trading
