Support and resistance in technical analysis ? a guide to beginners to technical analysis!

I will be giving a simple and general discussion of support and resistance to budding technical analysts who wish to invest money in the stock market but wish to acquire some skills and ideas first. What are support and resistance levels? What is support and resistance to begin with? This article deals with it all. Support and resistance are important elements of technical analysis, where supply and demand curves intersect. Prices are driven by excessive supply and demand. Supply is synonymous with ?bears? and selling, and demand is synonymous with ?bulls? and buying. As demand increases, prices advance and as supply increases, prices decline. All these are commonly known facts about supply and demand which you need to know as it will be useful in your investment education.
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What, then, is support? How is it connected to supply and demand? Support is the price level at which demand is strong enough to prevent price from declining further ? that is the key point that you should bear in mind. As the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches support, demand will overcome supply and prevent the price from falling below support. That is the relationship between supply and demand analysis and support. However, support does not always hold and a break below support signals that the bears have won out over the bulls. A fall below support indicates a new willingness to sell and/or a lack of incentive to buy. Support breaks and new lows signal that sellers have reduced their expectations and are willing to sell at even lower prices. Buyers, on their parts, cannot be forced into buying until prices decline below support or below the previous low. Once support is broken, another will have to be made at a lower level. Support levels are usually below the current price, but it is not uncommon for a security to trade at or near support.
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Now, let us consider resistance, the second idea that we must explore here. What is resistance, as opposed to support? Also, what is the relationship between resistance and supply and demand analysis? Resistance is the price level at which selling is strong enough to prevent the price from rising further. As the price advances towards resistance, sellers want to sell and buyers become disinterested to buy. By the time the price reaches resistance, supply will overcome demand and prevent the price from rising above resistance. Resistance does not always hold and a break above resistance signals that the bulls have won out over the bears. A break above resistance shows a new willingness to buy and/or a lack of incentive to sell. Resistance breaks and new highs indicate buyers have upped their expectations and are willing to buy at even higher prices. In addition, sellers cannot be forced into selling until prices rise above resistance or above the previous high. Once resistance is broken, another resistance level will have to be established at a higher level. Resistance levels are usually above the current price, but it is not uncommon for a security to trade at or near resistance. Also, price movements can be volatile and rise above resistance briefly; therefore, some traders set up resistance zones.
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Also, do note that it is possible that support can turn into resistance and vice -versa. Once the price breaks below a support level, the broken support can turn into resistance. The break of support signals that supply has overcome the demand. Therefore, if the price returns to this level, there is likely to be an increase in supply, and hence resistance. The other situation is resistance turning into support. As the price advances above resistance, the breakout above resistance proves that the demand has overwhelmed the forces of supply. If the price returns to this level, there is an increase in demand and support will be found.
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Trading ranges are important in establishing support and resistance as either turning points or continuing patterns. A trading range is a period when prices move within a relatively tight range. This signals that supply and demand are evenly balanced. When the price breaks out of the trading range, this signals that a winner has emerged, where a break above is a victory for bulls and a break below is a victory for the bears. It is sometimes important to create support and resistance zones. Each security has its own unique behaviour; analysis should show the securities? intricacies. Sometimes exact support and resistance levels are best, and sometimes zones are better. Again, the tighter the range, the more exact the level. If the trading price range spans less than, say, 2 months and the price range is tight, more exact support and resistance levels are better. If a trading range extends for months and the price range is relatively large, it is better to use support and resistance zones.
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You need to know these ideas and concepts because identification of key support and resistance levels is essential to technical analysis. It is difficult to establish exact support and resistance levels. However, just merely being aware of their existence and location already enhances analysis and forecasting. If a security is approaching a support level, it comes to remind us to look for signs of increased buying pressure and a potential reversal of price. If a security is approaching a resistance level, it can tell us to look for signs of increased selling pressure and potential reversal of the price. If a support or resistance level is broken, the relationship between supply and demand has changed again. A resistance breakout signals that demand has won; conversely, a support break signals that supply has won.
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In summary, what have you learnt from this technical analysis introduction? Support and resistance are important, and that is where supply and demand come in. Prices are driven by excessive supply and demand. Support is the price level at which demand is strong enough to prevent the price from declining further. Support does not always hold and a break below support signals that the bears have won out over the bulls. A decline below support indicates a new willingness to sell or a lack of incentive to buy. Support levels are usually below current price, but sometimes a security may trade at or near support. Also, price movements can be volatile and dip below support briefly. Resistance, on the other hand, is the price level at which selling is strong enough to prevent price from rising further. Resistance does not always hold and a break above resistance shows that bulls have won out over bears. A break above resistance shows a new willingness to buy or a lack of incentive to sell. Resistance levels are usually above current price, but sometimes a security might trade at or near resistance. Also, it is possible that support turn into resistance and vice-versa. Once price breaks below a support level, broken support can turn into resistance. The other situation is resistance turning into support. Trading ranges are important in determining support and resistance, a period when prices move within a tight range. It is sometimes useful to create support and resistance zones. Sometimes exact support and resistance levels are best, sometimes zones are better. Identification of key support and resistance levels is essential to technical analysis. However, being aware of their location enhances analysis and forecasting. More research and more knowledge is needed, so work hard at technical analysis to get better results each and every time you exercise your judgement.