Support and Resistance Levels
This is one of most widely used concepts in gold trading and it refers to levels on a chart that tend to act as barriers that prevent the price of an asset from getting pushed beyond a certain point in a particular direction.
Support
This level stops the price of an asset from getting pushed downwards & therefore it is regarded as the floor because it prevents the market from moving downwards past a certain point.
Example:
On the example shown below you can see that price moved down until it hit a support
Once price hit this level it slightly bounced back up, then resumed going down until it hit the support again.
This process of hitting a level and bouncing back is called testing the support.
The more times a support is tested and the market bounces up the stronger it is - the example shown below this level was tested three times without breaking. Finally the market trend reversed & started moving in opposite direction.
Once this level has been determined traders use it to place their orders to buy the at the same time putting a stop loss a few pips below it.
In the example above the market did not move below this area. It is an area where price can't break lower.
These regions form good points where price trend in a downwards trend is likely to reverse & get support and start moving upwards.
The demand to buy the at this point will be greater and therefore providing a good point to begin a buy trade, while placing stops some pips just below.
This support is also use by short xauusd sellers as a target where to set their take profit for their short sell trades.
This is another reason why the market trend is likely to reverse or consolidate at this level because once the sellers close their sell trades then momentum of the downward trend reduces and a consolidation will happen after which the direction is likely to reverse.
Resistance
This level stops the price of an asset from getting pushed upward these levels are therefore regarded as the ceiling because these levels prevent the market from moving upwards
Example:
On the example shown below you can see that price moved up until it hit a resistance.
Once price hit this level it retraced slightly the resumed going up until it hit the resistance again.
The resistance holds & is tested five times without breaking.
The more times a resistance area is tested the stronger the it is.
Once this level has been determined traders put their orders to sell at this level and at the same time putting a stop loss a few pips above it.
In the example above the market did not move above this area. This region shows an area where price cannot break above.
These levels form good points where a price in an upwards trend is likely to reverse after some resistance & begin moving downward in opposite direction.
This portrays that the demand to sell the at this region will be greater & therefore providing a good point to start a sell trade, while placing stops some pips just above this level.
This resistance level is also used by buyers as a target where to set their take profit orders for their bullish trades. T
His is another reason why the market trend is likely to reverse or consolidate at this level because once the buyers close their sell trades then momentum of the upward trend reduces and a consolidation will happen after which the direction is likely to reverse & begin moving down.
