Two terms that apply, especially in
technical analysis, are support and resistance levels.
The support level is below the current price of the instrument, where, as a rule, in the event of a fall, the price finds support. This means that the price is more likely to “bounce” from this level, and does not go below (breaks) it. For example, if you notice that the market is having difficulty getting prices below a certain level, it means that you have identified support. The general rule is that support levels tend to keep prices from falling.
The resistance level is above the current price of the instrument and acts as a ceiling of prices as they rise. Contrary to support level, resistance levels mean that the price is more likely to retreat from this level than break through it. A general rule for resistance levels is that they seek to stop price increases and act as a price ceiling for growth.
There is a wide range of tools and analytical methods that help determine support and resistance levels, below is an example of some of them:
Analysis of previous peaks and pullbacks;
When support / resistance levels are violated, a breakout or rebound usually occurs until another support or resistance level is found. For example, a change in price may encounter difficulties in overcoming a certain level of resistance. The price can test this barrier two or three times before overcoming and continuing to grow.
A rebound is a situation where an asset bounces off a level that has been identified as resistance or support. Take a look at the chart below: OIL.WTI was hard to beat above $ 55 a barrel. The price rebounded several times the resistance level and later dropped, sending the price of the goods 7 dollars lower for a relatively short period of time.
While a rebound is more likely than a break, the latter will be a signal that the market may change the trend, at least in the short term.
A break is an important point in
, as it usually leads to a rapid increase in volatility. As shown in fig., the pair tried a level below 1.35, and after it ultimately succeeded, there was a rapid downward movement.
In addition, after overcoming the level of support, it will become a new level of resistance and vice versa. In the example shown, Fig. for the USDMXN pair 20.00 was a critical level, which many traders looked at. After the rebound from it, the pair rose by 2 units and reached a historical maximum at 22.00. However, since then the decline began and the USDMXN pair broke through 20.00, tested it again (support turned into resistance), could not go higher and continued to move down. This is a typical situation to look for, as it provides many opportunities for investors to join this trend. In this situation, the investor could sell the pair after retesting at 20.00.