Disclaimer: You shouldn’t use just one of these trading indicators. Multiple Technical indicators mixed together can develops a trading strategy.
The Basics of Support and Resistance
Support and resistance levels are the most basic yet important things to understanding technical analysis and price action analysis. A support level is a key price that market makers won’t let the price fall below. The best way to explain why this happens is that there is a buyer or buyers that keep the price above a certain level. When you look at a chart these levels are easy to spot because the price will drop to this level and there will be buyers to drive the price back up. A Resistance level is the high where buyers quit buying and sellers start selling. On a chart, you will see that the price will hit this level and then drop multiple times.
The cart above is Bank of America on a daily chart. From looking at this chart we can see that the price action doesn’t drop below the key support at the bottom of this chart during this time-frame of a year. Also, buyers stop buying this security when it hits a key resistance level. During this time-frame, these were key price levels and it traded between them.
We can see from looking at the chart that when the price breaks a resistance line it often times goes higher. That old resistance line then becomes a new support line. The term that is used to describe this is a breakout. There are other times on the chart when this breaks the support line. Often times the price will trade lower and the old support line will become the new resistance line.
In a sideways trend, like the one we are looking at on the example chart can make good trades without using any other indicators. These are important levels to the overall market so they can create buying and selling opportunities for short-term traders. A sideways trend that lasts this long and that is volatile isn’t normal. I will talk more about trends in other technical topics.