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Levels of support and resistance

Imagine watching the game of tug of war:

On the right you place what we call buyers, on the left those that we call sellers.

At the start, sellers and buyers are starting to pull the rope and release all their energy. Each group, however, pulls on his side, and since the two forces are equal, apart from some yank, no one loses the starting position.

In practice, if we want to relate this example to the market, we would be in a period of low volatility, so with demand (buyers) and supply (sellers) that are balanced, and therefore stable prices.

The price in fact shows us the progress of the constant struggle between buyers and sellers. In short, if the price goes up, except other variables, it means that the demand of the buyers has increased, or that the supply of sellers has decreased, but if it goes down the opposite occurs.

Resistance and support indicate a possible excess balance between buyers and sellers.
Think of the Resistance as a line indicating the price level above which the share price has difficulties to grow, while the support is the line that indicates the price level under whom the share price shows great difficulties to fall.

Inside support and resistance swings the price of the security.

When buyers increase the demand and this exceeds the offer, the price tends to rise up to overcome the price of resistance, that is to break up the resistance.

When the opposite occurs, the price drops downwards and if the pressure is so strong it breaks down the line of support, that is the price falls below the supporting price.

Once broken the support, if the security does not have the strength to date back and regain the lost money, then the support becomes resistance.

Vice versa, risen above the resistance, if subsequently the title does not return below the price of resistance, then the resistance line is transformed into support.

As already mentioned, as long as the title remains between resistance and support, then it follows the same trend. When breakage occurs in the level of support or resistance, can arise a trend reversal, or an acceleration of the same.

Application
The analysis of the levels of support and resistance are used by traders to try to forecast if the trend is undergoing an acceleration or an inversion.
Traders who are able to correctly identify the trend movements are able to make excellent profits.

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