How to Identify Support and Resistance Transitions in Trading
The transition from range-bound to trending is relatively easy to identify visually and is the easiest to trade profitably. To find the transition, you must be familiar with the concept of support and resistance. You will see support and resistance used in many contexts. For example, they are used to identify a trading range. They are also used to help identify when a trend has reached its end.
For an example of how support and resistance levels are shown on a chart, you will see TWX stuck in a trading range. The support line shown on this chart is at approximately $13.50; the resistance line is shown near $16.50.
Support is always the lower trading-range boundary; resistance is always the upper trading-range boundary.
When technicians talk about support, they mean the price where buyers are willing to buy enough stock to stop the price from falling.
Said another way, when sellers see enough buying interest at the support price, they may still be willing to sell, but, as for now, they’ll sell only if they can coax buyers to raise their bids. Buyers are now eager to buy, so they’re willing to bid a little more to complete the transaction. The result: Prices end their descent and begin heading higher.
The reverse is true as the stock price approaches the resistance level. Buyers begin losing interest as the stock reaches elevated prices. Eager sellers must lower their offer (asking) price to complete the transaction, which causes prices to stop rising and begin falling.
Support levels and resistance levels often are determined visually by means of a chart. Knowing the exact price where lines of support and resistance need to be drawn is difficult, and traders may differ on where to draw these lines. Some choose the extreme, plotting intraday highs and lows of a trading range during a specific time frame to establish those levels.
You can use closing prices on a daily or weekly bar chart to define the upper and lower boundaries within the trading range. If you’re analyzing an intraday chart, use the last trade price on each bar when drawing the support and resistance levels. In our opinion, closing prices (or last prices) have more significance and better represent the consensus of traders and investors. Ultimately, the choice is yours.
Technical analysis is not an exact science. And as such, thinking of support and resistance levels as areas of support or zones of resistance is probably better than viewing them in terms of specific prices or single lines on a chart, even though that’s how they appear.