Support And Resistance indicator: What It Is And How To Use It?
Technical Analysis was developed to predict the movement of stocks. It is based on historical price and volume information and can be used to predict future stock prices. Technical analysis can also be applied in the Forex market and Indices as well, see this here!
A support price is a level at which it’s difficult for a stock to fall. It is usually one or more price points at which buyers tend to enter the market, thereby preventing the price from declining further. These points are usually determined by an area of demand.
The most common type of support is found after a bullish run in which the prevailing trend is capping the further upside. After a sustained advance, the bulls may have little incentive to buy and the bears may be waiting to sell; therefore, the buying pressure begins to subside and prices begin to stall. At this point, the market may find support at a prior low-price area or around a certain dollar value that represents buying interest for that particular stock on that exchange in that particular sector. These areas of buying interest are collectively referred to as support.
A resistance level is a price level where selling tends to outpace buying and thus prevent prices from rising above it. This can be due to many factors such as institutional investors who are holding profitable long positions accumulating more shares when they dip below that point, and so on. A break above resistance signals the potential for an uptrend.
Importance of Support And Resistance
Support and resistance are two of the most important concepts when it comes to technical analysis. These two lines play a major role in identifying potential reversal points during a trend, which can be used as targets for entering into trades or as stop losses when fading a move.
Lines that act as support and resistance are noticeable on every chart. They are present on all time frames from intraday charts to monthly charts. They hold true across all financial instruments, although the shorter-term charts will have smaller support and resistance levels due to the smaller amount of data used to draw the lines.
Targets for buying positions are found by drawing a trend line from the low point on one side of the trading range to the high point on the other side. This tells us where the price is likely to go after breaking through a specific resistance level.
When the price reaches that target, it’s time to sell because we’ve reached an area of higher demand for that stock (or currency pair or commodity). The reverse is also true: When the price falls below support, we have reached an area of lower demand, so it’s time to sell. As long as the price remains below support, we keep our stop loss just above that level.
How The Support And Resistance Indicator Works
The following example shows how the Support And Resistance indicator works:
As you can see, there are four different colors on the chart above: Blue (support), Red (resistance), Yellow (neutral), and Green (overbought).
The S&R indicator uses two moving averages: 50-period simple moving average and 200-period simple moving average. The S&R lines are calculated by adding the last 50 days’ closing prices, then dividing by 50; then adding the last 200 days’ closing prices, then dividing by 200; then taking an average of the two resulting values.
How To Use It?
The support and resistance indicator is used to identify levels of support and resistance at which price may reverse in the future. A price level is considered to be a support level when it prevented price from falling below a certain point during an uptrend, or a resistance level when it prevented price from reaching a certain point during a downtrend.
The demand zone, also known as the accumulation zone, is the price area in which traders expect the stock to go up. This is usually located between the support and resistance levels. If a stock closes above the accumulation zone, it’s considered bullish and traders expect the price to continue going up. If a stock closes below the accumulation zone, it’s considered bearish and traders expect the price to continue going down. When enough traders expect this, they start buying above the accumulation zone causing it to get filled with buy orders pushing prices up.
The supply zone is the opposite of the accumulation zone; it’s where sellers are expected to enter long positions because they’re expecting prices to go down. This is usually located between the support and resistance levels. If a stock closes below this area, sellers have started selling their positions pushing prices down. When enough sellers have exited their positions, this area gets filled with sell orders pushing prices down even further.