Support and resistance is probably one of the most widely used concepts in swing trading. These levels are used heavily by professional traders as points to enter and exit trades. Support and resistance levels can be major turning points in any market and knowing how to identify them is crucial.
Just what are support and resistance levels? As price moves up, it typically zigzags as it goes along and very rarely does it travel in a straight line. The last highest point it made while moving up becomes resistance. Likewise, the last lowest point it made while moving up becomes support.
These points where price stalls and retraces from become significant levels in the market and the next time price approaches them it more often than not faces some kind of support or resistance at these points.
A real life example of a typical uptrend with price finding support at different levels looks like this:
At the three support levels in the above picture, price finds support, bounces and then continues on with the trend. An example of resistance levels in a down trend is:
Again, price retreats to these levels, meets resistance, stalls and then continues on down with the trend.
Support and resistance levels can also form a line or barrier preventing price from going above or below that price point. In the example below, price has met strong support each time it tried to drop only to bounce. This would be considered a strong level of support because price approached 3 times and each time failed to break through and continue on.
A certain price level may also offer strong resistance. In the example below, you can clearly see that the price level has offered strong resistance and each time price approached, it failed to break through and continue on.
If price manages to break through either of these levels the second or third time it approaches them again, support then becomes resistance and resistance then becomes support.
Also, the more often a level of support or resistance is tested and holds(price does not break through) increases the importance or strength of that level.
Support and resistance levels are typically where big banks and other large players are waiting to enter and exit trades. These market players understand and know the power and importance these levels play and use them to their advantage.
In the examples above, where price stalled at the different support and resistance levels offers an excellent chance for a trader to enter a trade before price continued on with the major trend. Support and resistance levels are points in the market where the odds of entering into a profitable trade are increased greatly.
Knowing where these levels may be adds a significant edge to your swing trading.
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