Technical analysis is the study of historical prices and the willingness to make an investment decision based on an evaluation of historical patterns and studies. Support and resistance levels are some of the most efficient ways to analyze markets as they provide levels of demand and supply for an underlying security. When resistance or support is breached it forms the basis for continuation.
Most traders use a chart or graph to determine levels of support and resistance. Support levels are areas of market demand where investors are interested in purchasing a security. Resistance is a level of supply where investors are interested in selling a security.
There are a number of ways an investor can find support and resistance levels. One of the most efficient ways is use price bars is to connect lows to generate support.
In the chart above, the red lines reflect areas of support that are generated by connecting the lows in October. A close below this level would be considered a breakdown, as demand at support dries up allowing short sellers to push the price lower.
A second type of support methodology is to use a moving average. A moving average is an average that changes over time. For example, a 10-day moving average calculates the average by computing an average over the past 10-days. On the 11th day the first day in the average is dropped and a new average is calculated. Moving averages (such as the one in the chart above that is referred to by the blue arrow) are excellent tools to use as support and resistance levels as they reflect a mean over a specific trading distribution. Similar to calculating support and investor can use horizontal trend lines and moving averages to calculate resistance.
Support and resistance levels can be used to trigger signals for daily, weekly, monthly or even intra-day periods. One important idea is that a time period should coincide with the specific tenor a trader is planning on using. For example, if investors are looking for a strategy on daily prices, they should strongly consider using daily support and resistance levels to generate strategies. If a trader is looking for short term investment ideas, they should consider intra-day movements using hourly prices to generate support and resistance levels.