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In financial markets, support level and resistance level are two key concepts in technical analysis. Understanding and applying these concepts can help traders make smarter trading decisions, reduce risk, and increase their chances of profit.
1. Definition and identification of support bits
Support level refers to the strong support received when the price falls, which usually makes the price stop falling and rebound. The reasons for the formation of support levels include the following:
Increased demand: When price approaches support, buying increases and demand rises, pushing the price higher.
Market Sentiment: Market participants generally view support as a reasonably priced buy point.
Past History: In past price movements, support levels have prevented prices from falling further on multiple occasions.
Ways to identify support bits include:
Graphical analysis: Watch historical price charts and look for patterns of price rebounding at a certain level.
Technical indicators: Use technical indicators such as moving averages and Bollinger Bands to assist in confirming support levels.
2. Definition and identification of resistance levels
Resistance is a barrier that a price encounters when rising, often causing prices to stagnate or fall back. The reasons for the formation of resistance levels include the following points:
Increased supply: When price approaches resistance, selling increases and supply rises, suppressing price.
Market Sentiment: Market participants view resistance levels as selling points where prices are too high.
Past History: Resistance levels have capped price gains many times in past price movements.
Ways to identify resistance levels include:
Graphical analysis: Look at historical price charts and look for patterns where prices pull back at a certain level.
Technical indicators: Use technical indicators such as trend lines and reversal signals to assist in confirming resistance levels.
3. Application of support and resistance levels
Breakthroughs and Reversals:
When price breaks through support or resistance levels, a new trend may emerge. A breakout of support may signal a downtrend, and a breakout of resistance may signal an uptrend.
Breakouts of support and resistance levels are often accompanied by increases in trading volume, which can confirm the validity of the breakout.
Reverse transaction:
Consider buying when price is close to support and selling when price is close to resistance.
Note that after a support or resistance level is broken, the original support level may become a new resistance level, and the original resistance level may become a new support level.
Risk management:
Set your stop loss below support or above resistance to reduce potential losses.
Adjust take-profit levels near support and resistance levels to ensure that profits are locked in if the price retraces.
By mastering the analysis skills of support and resistance levels, traders can better grasp market trends and develop more effective trading strategies.