Support and resistance are important concepts in technical analysis and it helps traders to gauge the behaviour of market participants. These two help traders to determine the price trend and potential reversal in the direction of the price of a security. In many occasions, a support zone can become a resistance zone and vice-versa due to change in traders’ outlook and behaviour. These support and resistance levels are created due to market psychology and collective action taken by market participants

Technical analysis is about determining the mood of the market and how the market participants are behaving during a timeframe which can be minutes, hours, days, months, etc. Technical analysis helps traders to analyse if the market is optimistic or pessimistic or indecisive. If the market is optimistic, it is in a bullish phase and the price tends to rise. If the market is pessimistic, it is in a bearish phase and the price tends to fall. If the market is indecisive, the price tends to move sideways or move between support and resistance zones. 

What is Support?

Support is an area or a zone on the technical chart where the price of a security stops falling further or reverses direction and the price increases because of strong demand from buyers. This is also called the demand zone because demand returns from market participants. Buyers go long in this support zone. In this support zone, the demand is higher than the supply. Here, accumulation of a particular security tends to happen and then the price starts to rise. For someone going long, these could be entry points. 

What is Resistance?

Resistance is the exact opposite of Support and it is an area or a zone on the technical chart where the price stops moving above this zone or reverses direction and falls because of strong supply from sellers. This is called the supply zone because a lot of market participants start selling the security when the price is in the resistance zone. In this resistance zone, the supply is higher than the demand. Here, distribution of a particular security tends to happen and then the price starts to fall. For someone going short, these could be exit points. 

Methods to find Support and Resistance Levels

Trendlines

Using trendlines to find support and resistance levels will give some idea about the direction and the overall trend of the price. If the price is rising, then you have to connect the higher highs to form the resistance and lower highs to form the support. However, if the price is falling, then you have to connect the lower highs to form the resistance and lower lows to form the support.

You can use horizontal lines to mark the support and resistance zones if the price is moving sideways for a long period of time. While marking the zones, it is important to note how frequently the price pauses and reverses in that zone. 

Moving Averages

Moving Averages are popular to find support and resistance levels. They are readily available on any technical analysis software and it can be used easily by any trader including a beginner. The most popular moving averages are the simple moving average and exponential moving average and you can use these moving averages across timeframes. 

Fibonacci Retracement

This is one of the technical indicators available to determine the support and resistance levels. You have to pick a timeframe and connect the lowest and the highest price that is visible on the technical chart. The key levels in percentages include 23.6%, 38.2%, 50%, 61.8%, and 78.6%. Among these the 50% and 61.8% are the most important as these are the levels where the price has a higher chance of changing direction which include moving sideways or reversal. This indicator helps traders to find important zones where the price of a security could reverse, pause or continue its trend. 

Other key factors to watch out for 

Support and resistance zones where the price has tested many times and changed direction rather than just once or twice becomes more significant. If a zone has seen more selling or buying then that is a strong indication that it is a strong support and resistance zone. 

Support and resistance zones on longer timeframes like weekly or monthly charts are more important than those zones seen on lower timeframes like 15-minutes or 1-hour charts.

It is also important to look for high volumes in support and resistance zones because it indicates high activity by sellers or buyers. So when the price comes back to these levels, you can expect the same buying or selling to happen in high volumes and the trend is likely to reverse. 

Conclusion

Learning how to find support and resistance will take some time and practice and knowing how to apply it will come with experience. It is one of the important concepts if you want to learn price action and become a price action trader. 

Knowing the right support and resistance zones will help you read the market behaviour better and acting on that knowledge will help you make the right entry and exit in a trade and minimize your risks more effectively.