"Emotionally charged events are remembered better and have a stronger impact in human behavior. The market causes joy or trauma to its participants and this is why support and resistance lines work."
Resistance and support lines are price levels which temporarily halt or reverse the continuous movement of the trend. When the trend is bearish, support lines are created where sellers are temporarily (or sometimes permanently) exhausted and cannot press the quote any lower. Conversely, during a bullish trend, the price level where buyers are checked is called a resistance line.
When a dealer enters a buy order, the broker has the order filled by executing as many offers as possible until the amount the customer desires is reached. If the original order is a large market order, the broker will keep climbing on the price ladder until the order is fulfilled. Support and resistance points are created when the total orders in the market are not enough to clear the offers at a particular price level. When the orders are sell orders, and there are more than enough buyers at a particular price to exhaust the sellers, that price level is called a support; when there are more sellers than the buyers' orders can clear, the price level is a resistance.
Since many participants expect a price level to resist or support the quote, that price level will act in the anticipated manner regardless of what the other variables suggest. In a sense, technical analysts claim that traders behave like pack animals.
Emotionally charged events are remembered better and have a stronger impact in human behavior. The market causes joy or trauma to its participants and this is why support and resistance lines work. But there are a few more reasons.
Take a look at the video in which I explain how does the indicator work, how to use it, what makes it especial and how different price levels are collapsed by proximity.
The basic and most important usage of price levels it not to trade breakouts like most people think, but to recognize price ranges in which a trade can move favorably without being disrupted. Support and resistance levels are not fixed prices, but price ranges: this is why breakouts do not work very well by their own.
The best scenario to go long is the following:
The exact opposite applies for shorts. Let's look at some examples.
The goal of using support and resistance lines is to find price ranges in which a trade can move favorably without being disrupted and increase the expectancy of your trades. The perfect setup is a strong rejection of a price level far away from the next one. Below are a few examples.
When loading the indicator to any chart, you will be presented with a set of options as input parameters. Don't despair if you think they are too many, because parameters are grouped into self-explanatory blocks. This is what each parameter does.
The line settings include line widths and colors. You can choose which is the minimum and maximum width for every line plotted on the chart, as well as the different colors used to highlight the relative importance of support and resistance lines.