V.9:1 (17-19): Support And Resistance Levels by John J. Kosar

Support And Resistance Levels by John J. Kosar

With the advent of personal computers and charting software, support and resistance levels and their value as a technical tool have been overshadowed by sophisticated indicators. Nonetheless, support and resistance levels are one of the most basic and essential components of technical analysis.

Support and resistance are price areas where an abundance of trading has taken place and where considerable buying or selling pressure exists. Underlying support (that is, buying pressure) keeps a market in an uptrend, and overhead resistance (selling pressure) keeps a market trending lower. Once a trader can accurately determine where these areas are, they can be used very effectively to manage risk. By entering trades at price levels at which a significant move is likely, the probability of reward over risk is improved.

There are support and resistance levels that are applicable to every trader's time frame. Observing how the market reacts when encountering these levels is a very good barometer to measure the strength of the underlying trend. Traders with a very short time frame, including floor traders, arbitrageurs and individual day traders, often rely heavily on intraday support and resistance levels to enter and exit the market. Position traders use longer-term support and resistance to either initiate or add to their positions, as well as for placement of protective stop-loss orders. Large quantities of stop-loss orders will usually accumulate at key support and resistance areas and will often contribute to a dramatic surge in the market in the direction of the breakout once these areas have been penetrated.