An area on the chart where the price stops when it goes down. In other words, the price stops falling at that level.
An area of the chart where the price stops rising when it rises. That is, the price stops rising to that level.
How to indentify Support and Resistance?
Supports occur when the market in general or investors consider that the price of the asset is too low, then the price at that level rises as they start to buy. On the other hand, resistance occurs when the market considers the price of the asset to be too high and investors start to sell, causing prices to fall.
These areas are of vital importance to all investors, as support and resistance are used to mark entry points for either buying or selling.
How to draw Support and Resistance lines?
Looking at a Japanese candlestick chart, resistance and support zones are plotted as follows:
When we see that the price reaches an area where it stops and is not able to overcome it, we draw a horizontal line. To establish this, as with trends, you need 2 points of coincidence and one of confirmation, i.e. at least 3 points that show that the price stopped at a support or could not overcome a resistance.
It is common that a support becomes resistance at a given moment, or vice versa, i.e. when a support is broken, it becomes resistance, when a resistance is broken, it becomes support. An example is shown in the chart:
When the trend is upward, resistances become supports. In a downtrend, supports become resistances.
The supports and resistances of higher timeframe charts are more relevant, they are usually important. For example, if we are analysing a daily chart, and we see a weekly resistance or support, these areas will be more difficult to overcome, they are important areas for making investment decisions.
Why is necessary to identify major support and resistance levels?
Because they are the basis of trading, as most strategies based on price action, need to correctly identify the most relevant supports and resistances.
They are used to detect probabilities, such as if the price has reached an area where it is likely to change direction; and to place stop losses, as this allows us to shorten the loss by placing it in a delimited risk that we are assuming. If our trade is to the upside, the stop will be below support. If we go down, the stop will be above resistance. (we will see this later).