What is resistance level?
This is the price level at which selling of a security is deemed strong enough to eliminate the increase in price. The resistance level is usually identified on a bar chart and it’s located at the upper levels of range bound markets.
It is common knowledge that upward price actions results in a resistance level. In a range bound market, price declines to a near term support level before rising again.
That is why the more times the market attempts to unsuccessfully rise above the ceiling, the higher the chance of attaining and remaining at resistance level.
Resistance level is used by traders and investors in formulating trading strategies just like support level. Logic dictates that advances in price towards resistance means more sellers are willing to sell while buyers are less inclined to purchase.
As a result, when the price attains resistance level, supply will be overcome by demand. This prevents the market price from advancing above resistance level.
Causes of Price Resistance
Volume is a great indicator when it comes to trading and it helps traders and investors formulate winning strategies. In trading, there are circumstances that may result in the increase of volume in the market. As a result, the more the supply, the higher the chances of attaining resistance level.
This has been found to be as a result of a large institutional investor liquidating a vast amount of stock at a certain price.
Due to the large order, the market prices will experience a high. To return back to normal market conditions, the large order must be absorbed. If not, resistance will prevail.
Another cause that has been identified is popular technical price patterns. During trading, traders and investors may react to sell trigger points. This may originate from popular technical price patterns. As a result, traders and investors will experience resistance.
How to Identify Resistance Level
For many traders, it is quite difficult to identify resistance level. Using the steps below, you will learn how to determine resistance much faster.
1. Identify psychological resistance areas
To identify psychological areas, look for places where an asset’s price ends in round figures. Once you have done so, you can check the areas to determine whether it has been identified as a resistance previously or not.
2. Use pivot points
Pivot point refers to a price level used as an indicator of market movement. It is determined by calculating the average significant prices derived from the performance of the market in the previous trading period. Yes, there are traders who may decide to calculate the pivot points but why choose such a complex method while you can simply use available online tools that will draw lines automatically.
3. Price action zones
This is the most common method used by traders and investors when identifying resistance level. As sticky points located on the chart, analysts use them to identify the exact location of price action zones. Unlike in support level where traders seek low points, in resistance, high points are identified. Once you have located the price action zones, draw a horizontal line to connect them.
Final Thoughts
Resistance level is a key ingredient in technical analysis. It plays a major role in forecasting. As a result, traders and investors are able to formulate excellent trading strategies.
To draw perfect resistance level lines, identify the location where the market has been rejected three times on the same level. This is because the more rejections a level has, the more vital it is.