How to draw support and resistance

How to draw support and resistance

Both the resistance and the brackets are two of the most basic concepts in the technical analysis of financial markets. And when we talk about basic concepts we mean that they are very simple to understand and they are one of the pillars on which are founded the technical analysis. First that all are going to define its support and that it is a resistance.

Resistance is defined as a level or price above the current price at which sales force stop and finally exceed the strength of purchase with which puts an end to the bullish momentum. This causes that the price starts to fall and even reverse the upward trend. In a graph like the one shown in the following figure as previous highs reached by the price before falling resistances can be identified. In an uptrend, as ever higher maximum resistances can be displayed.

The concept of support on the other hand is the opposite of resistance. Defines support as a level or price below the current price, in which the purchase force even and finally exceed the sales force, whereupon the bearish momentum looks stopped what will cause that the price goes up and even reverse the downward trend. Usually in a graph stands reached minimum can be identified until the price begins to rise. In a downtrend, supports increasingly lower minimum can be identified.

The following image shows several real-world examples of resistance and support.

RELATIVE STRENGTH OF THE SUPPORT AND RESISTANCE

Some experts and analysts use a classification of supports and resistances and divided them into strong, middle and weak. However there is some controversy regarding the validity of this classification since it tends to be rather subjective. However, there are some criteria that most analysts agree to determine the strength of a resistance or support level. These criteria are as follows:

A resistance or support is considered strong depending on how many times has been tested by the price without having been crossed permanently. I.e. more times has been touched a level of resistance or support by price keeping as such, can be considered that that level is stronger than one that has resisted less time to have been tested for the price.

A resistance or support level is strengthened as quotes go away from it (it) after having it tested. For example, if the price moves by 10% with respect to a resistance or support, this level is deemed stronger than other which price turned away only about 5%.

Between greater times that has existed a resistance or support, stronger. For example, a resistance that has been in force for 2 years is considered stronger than a resistance that has only a few days of existence.

THE TREND AND THE RELATIONSHIP WITH THOSE SUPPORTS AND RESISTANCES

When analyzing the trends in price charts, you can see that they are formed by a series of valleys and ridges that are produced by the movements of the prices. It is so in an uptrend there is a series of valleys and ridges successive increasingly higher, i.e., a succession of resistances and supports increasingly older.

When the market is in an uptrend, the levels of resistance represent breaks or rest areas in the path upward, which stop the action of the price temporarily, unable to do it permanently. An upward trend is to continue, is required the price exceeds the resistance level earlier, in such a way that reaches a new peak. Each time that the price tests a previous peak, the upward trend is in a critical period during which it could happen that the price does not exceed the previous resistance, which would indicate a sign of weakness in the prevailing trend. Likewise, it is necessary that the minimum are successively larger than the previous minimum. Where the price of the asset falls and reaches the front bracket, it is at a sign of weakness in the trend. 

Finally, if the price falls below the level of the front bracket, it is likely you are before a possible change of uptrend bassist.