Resistance And Support – Buy And Sell Layers
Based on the trend concept and the Dow theory, striking price levels can be worked out in the course of the price, at which the market can rise again (support) or fall again (resistance).
This post introduces the first two basic technical chart terms and their significance for the price development.
A trend always moves in a series of jagged ups and downs and the direction of these ups and downs determines the trend direction.
Strictly speaking, these jagged reaction lows and highs are also called support and resistance. Figure 4 shows supports and resistances using an upward trend as an example.
The reaction lows provide support for the course. At the supports, the buying pressure is greater than the selling pressure, the price rises. The intermediate highs that are striven for again after turning away from a support form resistances.
At resistance, the selling pressure is higher than the buying pressure and the price turns downwards until it reaches a support at which there is sufficient buying interest to let the price rise again. Resistance lines interrupt the trend continuation for a short time. Later they are exceeded, i.e. when corresponding purchasing pressure arises.
In the event of a downward trend, see Figure 5, the same principles apply in reverse.
The reaction highs are resistors and the intermediate lows are supports. The support is only temporary and will be exceeded at a later date if there is a correspondingly high pressure to sell.
The two illustrations clearly illustrate the trend concept. An uptrend can only continue if each reaction low (see support line) is higher than the previous reaction low. In addition, to continue an upward trend, any interim high must exceed the previous interim high. The reverse conditions apply to a downward trend.
Let’s stick to the uptrend. Please refer to Figure 1 again. Any previous resistance line that must be crossed to ensure the continuation of the upward trend must be considered critical.
Because if there is not enough buying pressure at this previous resistance line to push the price over the resistance line, or if the price is only able to cross this line for a short time, then a double top is formed. From this double top, the trend reverses as soon as the previous low, which serves as support, is exceeded (see Figure 3).
The same applies vice versa to a downtrend (see Figure 4), when a support no longer allows sufficient selling pressure to be built up and the subsequent buying pressure leads the price over a previous resistance. Such a trend reversal is called double bottom.
The Principle Of Role Exchange Of Support And Resistance
In the previous graphs, previous lows were referred to as support and previous highs as resistance.
But what will become of these supports if a trend reversal – for example in the form of a raised floor or a double top – occurs? You must have a pretty good idea: Supports and resistors exchange their roles. In other words, a support becomes a resistance and a resistance becomes a support.
Figures 5 and 4 illustrate very well the principle of role exchange between support and resistance.
Whenever a resistance is significantly breached, it changes its function and operates as support during a subsequent price movement. This principle applies in reverse to support: Whenever a support is significantly breached, it converts its function and operates as resistance during a subsequent price movement to the former support line.