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June 17, 2021

'Bulls' support, 'bears' resist. What are the price levels?

Image by TRADERS CLUB (PRAVIN CHOUDHARY)

Two lines that make your trading neater

In the previous letter, we wrote about the first step in understanding price movement, which was to analyse the price channel. The price can also be measured by levels. Let's examine how useful this might be.

What it is

The level that crosses the upper price value is known as the resistance level, while the lower is called the support level. Together, they represent the difference between bulls and bears on the market.

Bulls open buy positions, which increase prices, and bears open sell positions, which drive prices down. The result depends on how the price moves.

📈 Support—the levels at which the bulls control prices and halt them from falling further.

📉 Resistance—the levels at which bears act and control the prices. Resistance levels act the other way around since they show the price from which a trader can expect a decline.

Levels help a trader understand the possible magnitude of a price change and the direction of its movement.

How to build them

To determine the levels, you need to know the extremes, such as the maximum and minimum price values. Support levels are based on two or more lows and resistance levels on highs.

You need to build levels from right to left, moving from the last price value to the previous.

This is an example of a mirror level. At first, it was a resistance level, but since the price broke past the level, now it becomes the support level.

Important to remember:

📌The larger the timeframe, the stronger the level. The level displayed on the weekly chart is more reliable than the daily chart.

📌The more points that are used in the construction of the chart, the more reliable the level is.