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CHAPTER 4 - LESSON 3
Support and resistance levels are price levels where price has historically had difficulty breaking through.
Support and resistance levels are essential concepts in technical analysis that help traders identify significant price levels where buying or selling pressure may arise. Understanding these levels is crucial for making informed trading decisions and managing risk effectively.
Traders use these support and resistance markers to identify possible entry and exit points for trading, as well as to set their stop loss and take profit levels.
Here are some key things to know about support and resistance levels:
Price levels at which the market has historically had difficulty falling below.
• Traders use these levels to identify potential entry points for long (or buy) trades, as they indicate that the market is likely to bounce back up from that level.
Price levels at which the market has historically had difficulty rising above.
• Traders use these levels to identify potential entry points for short (or sell) trades, as they indicate that the market is likely to move back down from that level.
When a support level is broken and the price falls below it, that level may now act as a resistance level, preventing the price from rising back above it.
Conversely, when a resistance level is breached and the price rises above it, that level may now serve as a support level, preventing the price from falling back below it.
When the price of a currency pair appears to break through a well-established support or resistance level, only to reverse its direction shortly after.
Traders should be cautious when trading around support and resistance levels and should wait for confirmation of a breakout before entering a trade.
Support and resistance levels can be identified using various technical analysis tools, such as trend lines, moving averages, and chart patterns. These levels are formed based on previous price action and are considered important because they represent areas where market participants have shown a significant interest in buying or selling.
It is important to note that support and resistance levels are not exact price points but rather price ranges. Prices can fluctuate around these levels as buyers and sellers interact.
In summary, support and resistance levels are key tools for identifying potential entry and exit points. Be mindful, support and resistance levels are not exact price levels. Instead they’re areas (or zones) where the market has historically had difficulty breaking through. It’s also important to be cautious of possible false breakouts that may occur in these support and resistance zones.
Technical analysts use a variety of tools and techniques to identify support and resistance levels, including trend lines, moving averages, and chart patterns. In the next section, we will explore these essential tools in more detail.
Support and resistance levels in financial markets are calculated using various methods. One common approach is to analyze historical price data and identify significant levels where prices have repeatedly reversed or stalled in the past. Traders often look for areas where buying or selling pressure has been particularly strong, creating support or resistance.
These levels can be determined through technical analysis techniques such as trendlines, moving averages, Fibonacci retracements, and pivot points. Additionally, traders may also consider factors like market psychology, volume, and fundamental analysis to validate or refine these levels.
Ultimately, support and resistance levels are subjective and can vary depending on the trader’s interpretation and time frame.
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