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    Posted by Shane McQuillan 9 Apr
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    Resistance

    Resistance happens to every stock and trading pair at some point. Most of the time, significant resistance occurs at the upper levels of the market range of the underlying instrument; however, resistance will be present all through the span of the pricing with historical resistance points being formed over time.

    The amount of time that an underlying instrument, be it a share of a company or a currency, is in the field of resistance will be totally dependent upon a number of factors, with the most critical factors being the momentum of the underlying instrument, the volumes being traded at that time which both in turn dictate the demand for the underlying instrument..

    Knowing the resistance level is essential as most underlying instruments are not likely to increase in value much after hitting this level if the sentiment is starting to turn and may start to depreciate.


    What is a resistance line?

    If you are not sure what is a resistance line is, it’s a line created by market analysis. Resistance lines are plotted, and they are plotted in around points where the underlying instrument has encountered selling pressure.

    So, if a price has risen to the point of 20 and retreats, and then attempts to break 20 again and fail and then again and fails, this would be known as a point of resistance. There is an unwritten rule that after three attempts on a price at a given time, if the level is not broken, selling pressure will increase and a potential pullback could be in the offing.

    The selling pressure can come from either profit taking at that level or traders initiating short positions from the given resistance point.

    Resistance lines can and are broken all the time, but the underlying instrument will face more resistance to keep increasing in value and market sentiment on the underlying instrument begins to change.

    Every time that a stock hits the resistance line, the line is adjusted, making it more difficult to break this value with short sellers placing stops just above the point of resistance. Day traders will use the major resistance areas as points for profit taking.


    How to plot a resistance line?

    If you are new to trading or have been using other people’s resistance lines when looking at charts, it is wise that you learn how to plot a resistance line. Plotting a resistance line is simple as you are looking for the highs within the period that you are searching.

    Circle them, and create lines across to the vertical value marker of the graph. This will give you a general idea of when the stock hits resistance in that market. Most traders use a weekly and monthly chart to have a clear picture of what is taking place with the instrument.

    Be wary when using smaller time frames as historical resistance areas will also be present from previous trading periods. Use daily charts for analysis and shorter time frames for determination of entry and exit point in your strategy.


    When does a resistance line become support?

    The question of when does a resistance line become support is quite simple. For any underlying instrument, the resistance line becomes the support line when it penetrates the given resistance line.


    This is important as most traders will sell when a stock or any other instrument comes close to the resistance line.

    However, if the momentum and volumes are high and a significant break is made and held, the resistance has then become a support line.

    All stocks and trading pairs have their resistance levels. This level will change depending on the market and the time frame in which you are looking to trade. Over more extended periods, historical resistance levels will occur, and these are in fact, a major resistance area. Critical areas for the formation of resistance line and support lines are centered on full figures such as 1, 5, 10, etc. These become psychological levels both for the buyer and seller and as such major trading action will happen in these areas with limit entries and stops being gravitated to these areas.

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