Definition of support: support is a point on a chart where the probabilities work in the favor of at least a temporary halt in the prevailing upward trend. Buyers are the people that pose support in a sellers market (i.e. period when people are selling).
Edwards and Magee in their book; Technical Analysis of Stock Trends, defines support as buying, actual or potential, sufficient in volume to halt a downtrend in prices for an appreciable period. This means that supports act as solid zone (floor) that restricts the downward flow of erosion. How long to hold depends on the; thickness, height, and the amount of water flowing down.
Definition of resistance: resistance is a point on a chart at which the weights of evidences favors at least a temporary halt in an up-trending market.
Again, a classical book by the same authors quoted above defines resistance as ‘selling, actual or potential, sufficient in volume to satisfy all bids and hence stop going higher for a time.
In common parlance, supports are floors while resistances are ceilings. Demands are concentrated in a particular area for it to become a support (floor). I underlined the word concentrated just to draw your attention to the fact that supply and demand are by definition always in balance. The amount of shares or gold bought must equal the amount sold irrespective of the price it is selling at.
What determines the price level is the amount of enthusiasm exuded by buyers or sellers. If the foregone sentence is true, then support areas will mean areas on a chart where sellers become less enthusiastic or less willing to let their money or asset go and buyers saw reasons to be temporarily motivated.
Some people believe that supports and resistances occur in round numbers. Their reason is that participants in the market work on sentiments and have made up some psychological numbers to work with e.g., $400 for gold in the mid-1980s, and 1990s, the Dow in the 1970s and late 1990s.
Please note that there is no such thing as permanent support or permanent resistance. Price that you see support today can turn out to become resistance tomorrow. This will now smoothly take us to an often asked question about supports and resistances.
WHAT ARE THE GENERAL RULES FOR RECOGNIZING SUPPORTS AND RESISTANCES?
I have no ready made answer for this question but will allow you to leverage on my wealth of experience as a successful trader. Below are what I call five basic rules for the occurrence of resistance and supports:
1. The higher the volume of instruments exchanged (traded) at a particular price, the more likely that that zone (price) will turn into either a support zone or resistance zone.
2. Fast movement in price is likely to suggest a support or resistance
3. The more powerful the move preceding the support or resistance zone, the greater its potential as a barrier. Don’t get your self confused over this as it may sound to be contradicting the previous point. There is a difference between speedy and lengthy moves and a powerful move.
4. Breaking of any significant support or resistance zone suggests that there is a price breakout.
5. Supports or resistances are less likely to occur if the time lag between previous challenges of support or resistance zone is large.
Proper understanding of supports and resistances are vital to your knowledge toolbox as a technical analyst traders of any commodity or instrument.
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