Support and resistance: best indicators
How to identify support and resistance? And what is the best indicator? Learn more about support and resistance on Fineco's Newsroom.
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Support and resistance indicatorTrading indicatorsTrading
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What are the best indicators for support and resistance?
For an investor it’s essential to know how to identify support and resistance, two essential parameters to plan efficient trading strategies. Studying these levels allows to better understand the development of asset trends in order to understand when to invest in a stock and identify the most interesting trends.
For this reason, it is essential to use the best indicators for support and resistance, technical analysis instruments that help monitor price fluctuations and analyse behaviour when they move around specific levels. Let’s look at some tips on optimising your strategies to make better decisions when it comes to online trading.
Support: the definition
Asset prices are subject to upward and downward changes, developments that in certain circumstances give rise to trends in bear and bull markets. In particular, supports are price levels that assets cannot fall below by blocking downward movements at a given quotation level.
In fact, when the price reaches this value, traders start to buy the share and the price rises again, turning the downward trend into an upward one. These values are subject to confirmation to determine a support level, by looking for price points that offer a useful repetition to discover when the price inverts the trend.
Resistance: the definition
Resistance is a price level that assets cannot rise above by blocking an upward trend and turning it downward. In fact, resistance is the opposite of support, since it determines the upper limit of a price range that the share cannot rise above during a given analysis period.
This happens because when an asset reaches this price, traders start to sell, bringing the share value back down and therefore triggering a downward trend. Resistance lines can also remain at the same level for a certain period of time; however, you must pay attention to when the price breaks these levels.
How do you draw support and resistance levels?
To draw an asset’s support and resistance levels, special technical analysis indicators are used, essential tools to study and understand price development and market sentiment. In fact, the ability to analyse supports and resistances is an essential skill for traders.
Indeed, the basic strategy for online trading includes selling when the price comes close to the resistance level, whereas you must buy when the price is close to the support. In this way, you can take advantage of trends to operate in the market, following price movements to open long or short positions on shares.
How to use support and resistance indicators?
Support and resistance indicators help to analyse asset price behaviour by studying trends to plan effective investment strategies. Support and resistance levels may be:
- Fixed, for example when analysing the all-time high price of an asset
- Dynamic, if they continuously change based on price and on the period of time that is analysed
- Semi-dynamic, when the change in support and resistance levels happens following patterns that reoccur in a predetermined manner.
Depending on the type of support and resistance analysed, different indicators are used, in general looking to integrate the analysis tool’s indications to make the findings more precise.
Are support and resistance the best indicators?
Support and resistance are essential indicators for online trading since they provide crucial information on price behaviour and market dynamics. The study of these parameters allows for the identification of not just breaking points, trends and patterns but also helps set up automatic stop loss and take profit orders for risk management.
Obviously, it’s important to include these indicators within a complete technical analysis, whereas other important indicators must also be used to study different aspects of price behaviour. Nevertheless, support and resistance are essential when it comes to online trading since they are considered the basis for studying price development.
What is the best indicator for support and resistance?
Depending on the type of support and resistance analysed, a variety of indicators can be used. For fixed-price levels, generally the all-time low and all-time high asset prices are used, a long-term analysis that takes into consideration patterns that recur in given circumstances and tend to show up periodically over the course of months or years, like, for example, the all-time high price of gold.
Whereas indicators like Bollinger Bands and moving averages can be used to study dynamic support and resistance levels. These are tools that are capable of analysing the price behaviour when it moves around given values that change depending on the forces that affect supply and demand.
For semi-dynamic support and resistance level analysis, we can use indicators like pivot points and trendlines, tracing the fixed patterns of price ranges that change over time. Support and resistance allow us to better understand price movements and to identify range, trend and breakout points in order to invest more efficiently and discover the market’s opportunities.
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