Education

Introduction to Support and Resistance

This article will start with an introduction to support and resistance because it’s a common technique in trading and will help your understanding of the German DAX’s movements.

As you may already know, the price of a financial instrument like the German DAX is ultimately determined by supply and demand. Put simply, if the demand for a financial instrument is increasing in relation to supply then the price will rise. Whereas if demand for a particular instrument is decreasing in relation to supply, the price will fall.

So when we see an uptrend on a chart, we are seeing a period of time where demand has continuously increased in relation to supply. On the other hand, when you look at a downtrend, we are seeing a period of time where demand has continuously decreased in relation to supply. what we’re going to look at today is price levels where the

In this article, I want to look at price levels where the supply-demand equation reverses and price is expected to stop moving in the direction it was moving. So let’s look at the definition of support and resistance and see a couple of examples on some charts.

Support

Support is the price level of a particular instrument where there is enough demand should price reach that level to keep prices from falling further.

So in this example, you should be able to see a pretty good example of support. You can see that price has touched that level multiple times and then actually bounced off of that. Once it bounced, it never returned to touch it. So in summary, that support level is held.

introduction to support and resistance - support
Support

Resistance

Resistance is the price level of a particular instrument where there is not enough demand should price reach that level to keep prices rising further.

Here, you can see here that price touches this resistance line multiple times. These first two tests are enough to establish a resistance line. However, the third time is pretty good confirmation of that. So I hope you can see there the difference between support and resistance. In this example, you can also see that price did not break through that level.

introduction to support and resistance - resistance
Resistance

Support & Resistance (Trend)

These examples were for prices in a ranging market, one without a clear trend. However, support and resistance levels do occur in trending markets too. So the easiest way to plot them is to use trend lines. Here are a couple of examples on the German Dax. In the uptrend here you can see the price coming down, touching that uptrend line multiple times. On the other hand, the downtrend is the reverse.

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Channels

Finally, in our introduction to support and resistance we come to trend channels. These can form a very simple strategy for a trade as the price can respect these levels. When price bounces from trend support and reacts at a parallel level above, it forms a channel. This is known as a price channel. Price can often bounce between these levels. A very basic strategy is for traders to look for selling opportunities around resistance and buying opportunities around support.

A trend channel that has a positive direction, is often referred to as a Bull Channel. A trend channel that has a negative direction, is often referred to as a Bear Channel.

Bear Channel
Bear Channel
Bull Channel
Bull Channel

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