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Support and Resistance Levels

This is one of the most widely used concepts in stock index trading and it refers to levels on a stock indices chart that tend to act as barriers that prevent the stock index price of an asset from getting pushed beyond a certain point in a particular direction.



Support

This level prevents the stock index price of an asset from getting pushed downwards and therefore it is regarded as the floor because it prevents the stock indices market from moving downwards past a certain point.


Example:

On the stock indices example illustrated below you can see that stock index price moved down until it hit a support


Once stock index 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 stock indices market bounces up the stronger it is - the stock indices example illustrated below this level was tested three times without breaking. Finally the stock indices market stock indices trend reversed and started moving in the opposite direction.


Once this level has been determined traders use it to place their stock indices orders to buy the stock index at the same time putting a stop loss a few pips below it.

Support level on a stock indices chart


In the stock indices example above the stock indices market did not move below this area. It is an area where stock index price cannot break lower.


These regions form good points where stock index price trend in a downward stock indices trend is likely to reverse and get support and start moving upwards.

The demand to buy the stock index at this point will be greater and therefore providing a good point to start a buy stock indices trade, while placing stops some pips just below.


This support is also use by short indices sellers as a target where to set their take profit for their short sell stock index trades.


This is another reason why the stock indices trend is likely to reverse or consolidate at this level because once the sellers close their sell stock index trades then momentum of the downward stock indices trend reduces and a consolidation will happen after which the direction is likely to reverse.


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Resistance

This level prevents the stock index price of an asset from getting pushed upwards these levels are therefore regarded as the ceiling because these levels prevent the stock indices market from moving upwards


Example:

On the stock indices example illustrated below you can see that stock index price moved up until it hit a resistance.


Once stock index price hit this level it retraced slightly the resumed going up until it hit the resistance again.


The resistance holds and is tested five times without breaking.


The more times a resistance is tested the stronger the it is.


Once this level has been determined traders put their stock indices orders to sell at this level and at the same time putting a stop loss a few pips above it.

Resistance levels on a stock indices chart


In the stock indices example above the stock indices market did not move above this area. This region shows an area where stock index price cannot break above.


These levels form good points where a stock indices price in an upward stock indices trend is likely to reverse after some resistance and start moving downwards in the opposite direction.


This shows that the demand to sell the stock index at this region will be greater and therefore providing a good point to start a sell stock indices trade, while placing stops some pips just above this level.


This resistance is also used by buyers as a target where to set their take profit for their bullish trades. T


his is another reason why the stock indices trend is likely to reverse or consolidate at this level because once the buyers close their sell stock index trades then momentum of the upward stock indices trend reduces and a consolidation will happen after which the direction is likely to reverse and start moving down.

 

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