Trading Support and Resistance

[00:00:00.07] - Speaker 1
Support and resistance or supply and demand is the most important concept for a successful trading business. Understanding how to anticipate and read market supply and demand will allow you to develop a successful strategy. In this lesson, you will learn how to trade support and resistance. Technical analysis was developed to be able to decode the price action of an asset or market. We should always remember the basic principles of the market and human psychology.

[00:00:30.00] - Speaker 1
The market moves in trends, price discounts, everything and history tends to repeat itself. As we said earlier, price action can be defined as the movement of buyers and sellers. The price is the reaction of these movements. Everything is based on supply and demand. Support and resistance are used to identify areas of strong supply and demand.

[00:00:52.14] - Speaker 1
In these areas, the participants will tend to react and the consequence of these actions will be seen through the price. The example we always give is the purchase of the iPhone. Apple currently sells an iPhone for $1,000. At this price, many are willing to buy, but many find it too expensive and although they would like to have access to this smartphone, they don't buy it because of the price. However, if the price of the iPhone was to drop to $500, the result would be a sharp increase in demand.

[00:01:23.20] - Speaker 1
Buyers who weren't willing to buy at $1,000 now rush to the market because the cost of the product is far below the market value. This increase in demand will push the price of the smartphone upwards. Similarly, if the price of the phone rises to $2,000, fewer people will be able to afford it and the demand will decrease. The consequence of this will be a drop in price. We see this simple example every day in the markets.

[00:01:50.25] - Speaker 1
Investors develop models for evaluating the products or stocks they want to buy and price levels. They wait for these conditions to occur to come in and buy the stocks they believe are underpriced. Similarly, the same investors who bought these shares develop models to define price levels at which they are willing to sell if the price reaches these levels. Now let's analyze how to draw support and resistance lines. You can use different time frames to identify supports and resistances from the shortest to the longest, based on your investment strategy.

[00:02:24.27] - Speaker 1
When looking at support and resistance, we tend to use the daily chart. It can be done on any platform, but let's look at some examples on TradingView. In order to draw these levels successfully, you need to analyze the history of the stock. Look for high and low points or areas where a stock has slumped and and if there are any areas where the price has had consolidation, we can connect these price levels. On trading view, we can draw horizontal lines by using the tools on the left here, let's look at the Amazon stock and let's examine its price history.

[00:02:59.05] - Speaker 1
We can immediately spot levels of interest where the price tends to react. These are levels where supply and demand intersect. Investors tend to react to these levels. When the price drops to an important support level, more buyers will come to the market entering at a price they consider low. This is similar to what we mentioned with the iPhone.

[00:03:20.04] - Speaker 1
Buyers who were willing to pay a higher price for this asset are now eager to go. Long as more buyers enter the market, the price tends to rise. This continues until the price reaches a high point and encounters a resistance zone. At this point, investors holding the stock start looking to sell, either to take profits or because they believe the price has peaked and won't rise further. This influx of sellers causes the price to start falling.

[00:03:48.19] - Speaker 1
Understanding the dynamics of these levels is crucial. Support and resistance are not just lines on a chart. They represent key psychological levels where traders and investors make decisions. It's also important to note that these levels can flip. A resistance level, once broken, can become a new support level and vice versa.

[00:04:10.01] - Speaker 1
This is often observed during strong trend reversals. In our analysis, we also need to consider the volume at these levels. High volume at a support or resistance level can strengthen its significance. For instance, a breakout of a resistance level with high volume might indicate a strong bullish sentiment. Now let's do another example.

[00:04:31.28] - Speaker 1
On Google, we will use the daily chart. We can analyze the price action of the stock and start seeing important price levels. Using the drawing tools, we can plot our support and resistance levels. We can look at volume and start understanding the importance of each level. We want to be buyers when price reaches support and we want to be sellers when price reaches resistance level.

[00:04:56.12] - Speaker 1
We can also use support and resistance levels as risk management tools. If we are in a trade for a long position, support can become a stop loss level while resistance can be our take profit target. We can conclude this lesson by looking at the Menthor Q Momentum indicator and how we can use it for support and resistance. The Menthor Q Momentum indicator is a combination of three indicators. Support and resistance, Fibonacci and volume profile.

[00:05:26.22] - Speaker 1
We can add all three indicators or just one. Let's just use support and resistance. The indicator will plot these levels automatically based on the time frame selected. This concludes the lesson on how to trade support and resistance.