Do The Support And Resistance Levels Work?
Technical analysis lays a lot of emphasis on support and resistance levels. The support is the area of demand from where the price of the asset has a high probability of going up. The resistance is the area of supply from where the price of the asset has a high probability of falling in value. Technical analysis closely watches the support and resistance levels to take trades. Check this out here.
How are these levels formed?
To know whether the support and resistance levels work one needs to first know how these levels are formed.
There are major market movers like the institutional firms and the big brokerage houses that place their orders at a certain price range. This is where they wish their orders to get filled. It could, however, happen that the price shoots up from that level and does not give them a fill. Similarly, the institution may want to sell their assets at a certain price. They place their sell orders at a particular price range but because of a lot of selling pressure, their orders do not get filled.
It is these areas that form the support and resistance levels where the unfilled orders are placed. You want to look at these areas where there is a lot of buying or a lot of selling pending and as a retail trader, you should be able to able to participate in the market at this level. This makes it a high probability trade because you are trading with the big houses and thus buying the asset at a wholesale price.
Understanding the levels
The support and resistance levels thus work. There are many technical analysts who would not look at anything in the chart except the support and the resistance levels to place trades. This is because these levels can be plotted on the price chart and this is not lagging. The technical indicators and tools are used to give a trading confirmation but they cannot be used as the sole decision-making tool. The main reason for this is that these trading tools are lagging in nature and may not let you spot the trade at the right moment.
Look at the high probability area
Many traders trade using the support and resistance levels but see that they do not work out. This could be because they have not been able to identify the correct levels.