Strong selling pressure keeps a market price from breaking through a resistance level. Big sell walls, which prohibit the price from increasing further, can also cause the emergence of resistance levels.
There will be a “ceiling” at a resistance level because of the great number of sellers in that price range. Since resistance is a level that only considerable buying pressure can overcome, traders may see it as a stop-loss.
Resistance lines are typically drawn by technical analysts using prior highs as a reference point. One possible use for this approach is to forecast price reversal points. Levels of resistance can be represented in a number of ways. The most common is by using horizontal lines. But trend lines and diagonals are often used interchangeably.
When a resistance level is broken, it tends to become a support level, which is the exact opposite of what happened previously. Support levels operate as a “floor” that tends to hold the price above resistance lines, which typically act as a “ceiling,” preventing the price from rising further. When resistance or support levels are broken, good trading chances usually present themselves.
Consider at least two previous highs when constructing resistance zones or lines (ideally three or more). Using more data points will increase the reliability of your technical analysis. Support and trend lines can be drawn in the same way.
To rely solely on support and resistance lines is problematic, as is the case with the majority of technical analysis indicators. Using these tools in conjunction with sound basic analysis and other technical indicators will help to minimize the dangers involved.
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