Markets never rest. All the time there is something happenging in the market. Market are always moving up, down or sideways. A trend is formed when the price of a stock, currency pair or for that matter any security starts to go high and high or low and low in a steady fashion. It doesn’t mean it will go up or down in a straight line. Markets don’t move in a straight line. But most of the time, the market moves horizontally still up and dwon but with no trend.
Support and resistance concepts are the most simplest and easiest to identify with indicators and master on charts. Support and resistance trading is also profitable. These two levels are established in the market in response to the balance of supply and demand of a particular stock, currency pair or for that matter any security.
Market just reflects the crowd behavior. What the investing crowd is thinking, the market is thinking the same. Crowds tend to behave consistently. Support level is established at a certain price level when the buyers think that the stock, security or the currency pair is attractively priced at that level. So, the crowd continues to believe that price to be the best buying price and the support level keeps on appearing again and again until fundamentals change and the crowd starts new thinking.
Similarly there is a price level where the crowd thinks that the stock, currency pair or security is ovepriced. So when price action reaches that level, the crowd starts selling at that level. This level is known as Resistance level. Price bounces back at this level. If it is able to penetrate that level, it is known as a breakout and indicates that the market is changing its direction to a new direction.
So, resistance is the level at which the market becomes overbought and support is the level at which the market is oversold. How do you find the market overbought and oversold? You can use the Relative Strength Index (RSI) to know when the market is overbought and oversold. These overbought and oversold levels are just a reflection of the crowd mentalility.
The price action continues between the two levels. Support and resistance levels are significant forces in the market. They represent price levels where the crowd makes financial decisions about profit and loss.
Now, support and resistance levels are a fundamental concept that traders use to trade any market. No matter what market you trade, you will comes accross the support and resistance level. Trade stocks, forex, futures, options, commodities or ETFs, you will find these levels.
Range trading is another name of support and resistance trading. Most of the time, markets are ranging. What this means is that markets are only moving sideways with no clear direction. 75% of the time there will be no clear trend in the market. So range trading is the best thing to do. You buy around the support and sell at the resistance in range trading. It is as simple as that. First, you identify the support and resistance and then buy and sell at those level. THe price difference between the support and resistance is known as a range. The wider the range, the more profitable range trading will be.
Mr. Ahmad Hassam is a Harvard graduate. Learn this 10 minute a day Swing Trading Strategy: http://www.ninjatraderblog.com/trading/2009/10/swing-trading -can-be-a-better-option-than-day-trading/ Try this 1500 pips a day Strignano’s Forex Signals and learn how to trade like pros from Tom Strignano- an EX CHIEF BANK TRADER: http://www.ninjatraderblog.com/trading/2009/09/strignanos-fo rex-signals/
Article Source: Learn Support And Resistance Trading!