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«  February 2011  »

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Main » 2011 » February » 11 » Support and Resistance
11:43 AM
Support and Resistance
Support and Resistance   
The basic way of analyzing the trend in the market is through Support and Resistance. Support and Resistance is one of the most widely used concepts in futures trading. Most of the technical tools are drawn based on the basic level of support and resistance. For e.g. The Relative Strength Index (RSI) take 30 and 70 as support and resistance lines respectively. Basically support refers to the lower point, form where it is generally anticipated that the price would not go below that level and Resistance refers to the upper point.
Let’s have a look at an example:

The above diagram shows the bull market. We can see that when the market moves up, it returns after reaching the highest level (indicated by yellow line), which is the resistance. Likewise, the line rebounds as it reaches the lower level (indicated by yellow line) that is support. The support and resistance level signifies that the trend will reverse back after reaching the upper level or the lower level. However, sometimes, the trend might break due to the heavy market volatility; this could change the support to resistance and vice-versa.

Here are some important things about support and resistance:

1.When the price passes through resistance, the resistance would potentially become support.
2.    The more often price tests a level of resistance or support without breaking it, the stronger the areas of resistance or support is.
3.    When a support or resistance level breaks, the strength of the follow-through move depends on how strongly the broken support or resistance had been holding.
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