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Published On: Sat, Dec 29th, 2012

Technical Analysis: Support and Resistance

Next, we will look at the other side of the popular market analysis techniques commonly employed by spread betting traders when they are looking to forecast future price moves and place trades that are based on those forecasts.  Since technical analysis depends heavily on identifying significant price levels over a given time frame, what we will want to understand in the following sections is that there are certain price areas where buyers and sellers are likely to emerge based on the market behavior that has been seen in the past.

When looking for these types of levels, two of the most common terms that are used can be seen with “support” and “resistance.”  At times, the levels associated with these terms might be difficult to identify, but once they become present, these areas can prove highly useful when looking for areas to enter or exit a spread betting position.  Here we will cover the basics of support and resistance in technical price analysis.

Uncovering Price Barriers

The best way to understand the initial terms that will be discussed in these technical analysis sections is that there are certain areas on a chart that are likely to act as barriers, preventing certain price increases (or decreases) from occurring.  To be sure,it can be difficult to uncover these areas, as technical analysis can be highly subjective in nature (a price chart might look one way to one trader, and completely different to another trader).  But when these barrier areas are uncovered, technical trading becomes much easier to forecast.

Support Barriers

First, let’s look at a visual of a support barrier zone, and then we will discuss its attributes:

 

 

 

 

 

 

Looking at the chart graphic above, we can see an example of a support barrier that is defined by three separate touches.  Put simply, support barriers are price levels where buyers are expected to enter the market and push the price values higher, creating a rally.   The reasoning behind these moves comes from the fact that the market has repeatedly shown that once prices fall to this blue line area, the asset has become too inexpensive, and active buyers are looking to enter into the market.

If we remember from the previous fundamentals tutorial on Supply and Demand, this blue line would represent an example of enhanced market demand, and the ultimate result is that prices rally once declines reach this area.  When looking to base trades on this information, it should be known that many spread betters will be looking to buy this asset if prices fall to this area again in the future.  Because of this, this blue line should not only be viewed as likely to “support” prices, but it should also be looked at as a good area to buy (go long) the asset in question.

Resistance Barriers

Next, let’s look at a visual of a resistance barrier zone, and then we will discuss its attributes:

 

 

 

 

 

Looking at the chart graphic above, we can see an example of a resistance barrier that is defined by three separate touches. Resistance barriers are price levels where sellers are expected to enter the market and push the price values lower, creating a bearish decline.   The reasoning behind these moves comes from the fact that the market has shown that once prices rise to this blue line area, the asset has become too expensive, and active sellers are looking to enter into the market.

in this case, the blue line would represent an example of enhanced market supply (and diminished demand), and the ultimate result is that prices drop once rallies reach this area.  When looking to base trades on this information, many spread betters will be looking to sell this asset if prices rise to this area again in the future.  Thus, this blue line should not only be viewed as likely to “resist” prices, but it should also be looked at as a good area to sell (go short) the asset in question.

Conclusion

When looking to understand the foundations of technical price analysis, two of the most commonly used terms are Support and Resistance.  These terms represent areas where buyers are likely to enter the market (support), creating rallies, or areas where sellers are likely to enter the market (resistance) and push the asset’s prices lower.  These levels can prove highly valuable when constructing new trade ideas.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

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