What are Support and Resistance in Finance?
Support: it is an area of the chart that the price is low, it stops. That is to say, stops to get the price down to that level.
Resistance: it is an area of the chart that the price when it goes up, it stops. That is to say, stops up the price to that level.
The brackets happen when the market in general, or the investors believe that the price of the asset is very low, then the price to that level rises as they begin to buy. On the contrary, the resistances occur when the market believes that it is a very high price for the asset and the investors begin to sell, causing a fall in prices.
These areas are of vital importance to all investors, as the media and the resistors are used to mark points of entry, whether buying or selling.
Watching a japanese candlestick chart, we draw the areas of resistances and supports in the following way:
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 well as with the trends, you need 2 points of matching, and one of confirmation, i.e. at least 3 points that show that the price stopped at a stand or was unable to overcome a resistance.
It is common, that support becomes resistance at a given time, or vice versa, that is to say when a support is broken, it becomes resistance when a resistance is broken, it becomes support. The chart shows an example:
When the trend is bullish, the resistances become supports.
To be bearish trend, the supports become resistances.
Are more relevant supports and resistances chart of tempos higher, are likely to be important. For example if we are analyzing a daily chart, and we see a resistance or support weekly, these areas will be more difficult to overcome, are important areas for the investment decision-making.
Why it is important to identify the supports and resistances?
Because they are the basis of the trading, as most strategies based on the action the price, they need to correctly identify the supports and resistances are more relevant.
Serve to detect odds, as if it got the price into an area is likely to change of meaning; and to place stops for loss, as this allows us to shorten the loss by putting it into a delimited risk we are assuming. That is to say, if our operation goes upward, the stop will be below the support. If we are going to the low, the stop will be above the resistance. (we will see better later)