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PSE Stock Investing: Support And Resistance

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Support and resistance remain the topmost technical analysis tools employed by traders. Whether you’re investing in Philippine Stock Exchange or Forex, the concept of support and resistance will be the same. They refer to the price levels that act as barriers. They prevent the price from being pushed beyond a certain level. Note that support and resistance levels keep on changing.

The support occurs on a downtrend where the price pauses because the demand is consolidating. At this point, the demand for the asset will start rising. To identify the support level, the price must bounce off at least 2 consecutive times. Traders place their trades at the support level because they believe that this price cannot be broken. Thus, they can bet on the direction accurately. If the price manages to move in the predicted direction, the traders gain.

The support is, therefore, the level at which the downtrend will pause before it reverses direction. The concentration of demand forces the price to change direction.

To determine the support line, one needs to watch the price movement of an asset for a considerable amount of time. There will always emerge some points that prevent the price from falling further. Typically, these points can be two-three or even more. What is essential is that the price must not go lower than these points in more than two consecutive sessions. The support line thus provides an excellent buying opportunity. Once it is done, it encourages buyers to get into the trade buy assets. When they do this, they push the prices higher and higher.

The support occurs when the price is trending downward. Thus as the price reaches this point, it changes direction. Note that as the price of a security falls, it reaches a point that prevents any further decline. In some assets, this area becomes historical and can provide support to the asset for several years. It forms a series of declining troughs. When you connect these troughs with a straight line, you get the support line. Now, since traders have access to these images, they become aware that the asset will always encounter selling pressure at this point. So, there are higher chances that the price will reverse and start moving upwards. Keen traders will still get into a trade at this point.

The support level gets stronger, the more the times the price finds it hard to break the level. Therefore, it becomes easier for traders to choose this point as their entry and exit points. Traders become confident that the price will change direction. So they lineup and wait for the asset to hit the price. As more buyers get into the market, they exert pressure on the price to the extent that it changes direction. It makes it difficult for the sellers to continue selling to drive the price lower.

One important feature of the support level is that it will always occur when around figure is attained. Say P50, P100, P150 and so forth. So experienced traders will stop orders at this point or enter into trades. As such, most orders will always be placed around these prices. For instance, they may choose to place their orders around P50.06. At this point, so many traders will place orders. The P50 mark acts as a strong price barrier.

But when some extra force or enthusiasm emerges, the price breaks and drops below the support level. It can move downward and establish a new support level. When it happens, the old support level becomes new resistance. Note that the right support level will be determined where the asset has experienced a steady and steep decline. At this point, the traders are psychologically prepared to accept the new support level. The more the buying that occurs at the support level, the stronger the level is thought to be. Also, the more the number of times the support level is tested, the stronger it becomes.

The resistance level

It occurs on an uptrend. It is the point where the price is expected to pause and change direction. It occurs due to the concentration of supply. At this point, the traders remember what happened in the past, and psychologically, they will expect the price to change direction. They know that at this point, the price will halt for some time before changing direction. It prevents the traders from pushing the price further and so it is logical to conclude that the price will start declining.  They form a ceiling where the price cannot move also. Note that the behavior of traders at this point prevents the prices from going up. They reckon that the price of the asset will start falling sooner. So, they start disposing of the asset. This action makes the price to decline further.

Note that just as it was in the case of support, we need more than two consecutive points to establish a resistance level. Drawing straight lines touching these peaks will give you a resistance line.

Trading using the resistance and support levels

Basically, both the resistance and the support levels can be relied on to guide you in placing a trade. Traders will buy near the support and sell near the resistance level in a downtrend. The trend to provide guidance on the probable direction the price of an asset will move to. So, they will go short when the resistance level is reached and long when the support level is attained. This way, they are assured of some profit. Note that there is no guarantee that the price will change direction after hitting the support and the resistance level. Some unexpected events may occur, forcing the prices to break these barriers. Thus, the rule of thumb is that you should wait for a confirmation to occur before placing your trades.

Bottom-line

Both the resistance and support levels are critical in technical analysis. They are considered an essential tool in the analysis. The support can be treated as a floor on which the ball is hit before it bounces back while the resistance point can be treated as a celling. It holds the ball from going even further. It makes it difficult for the price to rise about it.

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