We need a prior understanding of the Japanese candlestick pattern before we discuss this lesson.
What is Support level?
The major prices at which sellers have already entered the market in adequate quantity and they pause to reverse the price movement.
The traders make use of these price levels to analyze the likely entry of sellers again into the market.
How can we analyze?
This can be analyzed on price charts with horizontal lines where there is pause in price at the same level again and again.
The support finds a price level where buyers enter the market.
The chart below is an illustration of this.
When the price keeps moving lower, it will hit a floor. This enables buyers to enter with adequate quantities overpowering the sellers and stop the price from going further low.
This helps in analyzing a support level.
Support can be used in the same way as resistance, either to enter a new long position or to close a short position.
How do we identify support levels?
We need to observe where the price repeatedly pauses in the same place. The sellers enter the market in this place.
The illustration below depicts: A horizontal line is placed at this price level to find a support level where buyers are entering the market and overpowering the sellers.
Exercise: Find the correctly drawn support levels. Show exercise
Support and resistance in a range
The price confronts the same support and resistance levels several times before breaking out of the range in a ranging market.
An overview of the lesson discussed so far….
At the support level, there are adequate buyers to stop the price from falling further and reverse the price to the upside.
At the resistance level, there are adequate sellers to stop the price from rising further and reverse the price to the downside.
Place horizontal lines on a chart where the price seems to stop repeatedly to find the support and resistance levels.
When our approach is stable, we can use the wicks or the bodies of the candlesticks to draw support and resistance.
Support can become resistance and resistance can become support.
We need to be careful to avoid false breakouts.
The price may pretend to break through support or resistance, but will reverse again in the opposite direction.