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Support is the price at which buyers emerge in large enough numbers to slow or reverse the downward fall of a security. There are various reasons for buyers to emerge but the key thing is that they do emerge.
Resistance is the price at which sellers emerge in large enough numbers to slow or reverse the upward rise of a security.
Support and resistance tends to occur at the same prices that occurred in the past, are numeric values that are multiples of 5, 10, 100, or are associated with widely watched indicators (e.g. Moving Averages, Floor Trader Pivots, and Fibonacci Numbers).
The support and resistance prices are often called "levels". The levels shown on the below charts were drawn before the price reached that level.
When support is broken (the stock moves below a support level) then it becomes resistance (it will be hard to move back above it on the way up). In a like manner,
resistance becomes support.
Moving averages are a popular way to find levels. The most popular moving averages are: 200week moving average (WMA), 200 day moving average(DMA), 150DMA, 100DMA, 50DMA, and 20DMA.
Fibonacci Retracement levels are very useful guides to use when
looking for entry points on a pullback. If the pullback is
deeper than 38.2% then you should use caution since you may be
looking at a reversal, not a pullback.
Many traders find it useful to track the trajectory of a security with a trend line. A Trend line is drawn under a rising stock and above a declining stock. The breaking of a trend
line of has no meaning; the stock security simply needs a rest.
The first rule of trading with Support and Resistance levels is to watch how the price action is treating the level. If it pays little attention to it, then the
level is not going to work. If it exhibits classic Support/Resistance interaction behavior with the level then you should play the level as if it will work. By
work we mean that you can try buying support, if it holds and selling resistance, if it holds.
If a security dips down to support level you can try a long position. If that support level then breaks, you can close the long position. You have now entered a trade with a very tight stop loss and a good risk/reward profile.
It is best to set stop loss levels below support(long position). It should not be too close to support because it is common for there to be a minor violation of the level. The reverse is true for short positions.
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