Support and Resistance Levels

Support and Resistance Levels

Support refers to the price level on a chart where equilibrium is reached. This means that demand has increased to match supply. This causes the decline in the price of the asset to halt; therefore, price has reached a price floor. As you can see from the chart below, the horizontal line below price represents the price floor. You can see by the blue arrows underneath the vertical line that price has touched this level four times in the past. This is the level where demand comes in, preventing further declines. This is support.

Why support and resistance levels become weak?

Support and resistance levels are areas or price zones where the buying or selling pressure stops price from further decline or further increase. Thus, price finds it harder to breach these levels and in most cases results in a reversal in the direction of prices. But this is not always the case as time evolves, these clear areas of buying and selling pressure start to become diluted.

There are many different ways price breaches or breaks a support or resistance levels.
The most common ways are:
  1. Price breaks the support/resistance level with a strong bullish or bearish candlestick
  2. Price hovers around the support/resistance level, makes a fake breakout and then breaks the support/resistance level

The first example below shows two of the instances mentioned.