Resistance, Support and Channels

In the last lesson we discussed the direction of the price action, the trend and tended to hint towards support and resistance levels and channels. In the current lesson we are to dwell deeper into these subjects.

Support is a level or area on the chart where buying interest is sufficiently strong to overcome selling pressure. A decline is halted and prices turn back up. A support level is identified beforehand by a previous reaction low. So practically support levels are to be identified primarily observing where the downward action had been reversed or even halted in the past. Hence in the search of support levels we are looking for what troughs the price action had marked in the past.

Resistance is the opposite of support and represents a price level or area where selling pressure overcomes buying pressure and a price advance is turned back. In a similar fashion like a support level, but in reverse, a resistance level is identified by a previous peak.

Whenever a support or resistance level is broken by a significant amount, they reverse their roles and become the opposite. In other words, a resistance level becomes a support level and a support level becomes a resistance. Also fresher troughs and peaks tend to be more relative to the current price action than old ones.

It’s characteristic how a channel in a sideways movement works with the lower boundary working as a support line and the upper boundary as a resistance level. However channels could be sloped, upwards and downwards. If the channel is ascending, traders can enter long positions near the lower bound and take profit near the upper bound. Likewise should the channel have a downward direction, again traders can enter long positions near the lower bound and take profit near the upper bound. The break out of a channel can also assist to identify trend acceleration or trend reversal.

In the current lesson we discussed the role and the identification of support and resistance levels, as well as channels, in the next lesson we are to discuss the Fibonacci retracements.