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BEGINNER

2. T
 he Secrets of
Support & Resistance
H A N T E C R E SE A R C H WE B INARS - Technica l Ana lysis Series

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.

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.

Figure 1: Support and Resistance

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.

2. The Secrets of Support & Resistance


H A N T E C R E SE A R C H WE B INARS - Technica l Ana lysis Series

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.

Figure 2: Old support becomes new resistance

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.

H A N T E C R E SE A R C H WE B INARS - Technica l Ana lysis Series

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Figure 4: Range trading using the Bollinger Bands on Silver

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