SUPPORT (Demand) and RESISTANCE (Supply)

Charts have great value to traders who understand them, because they constantly reflect the relation of Supply (resistance) and Demand (support). They reflect the development of forces that are likely to act as soon as they are strong enough to overcome the resistance that opposes them.  They present in graphic form accumulated evidence as to whether or not this resistance will be overcome.

A support level is a price level where the price tends to find support as it is going down. This means the price is more likely to "bounce" off this level rather than break through it. However, once the price has passed BELOW this level, by an amount exceeding some noise, it is likely to continue dropping until it finds another support level and the old support becomes resistance level.

A resistance level is the opposite of a support level. It is where the price tends to find resistance as it is going up. This means the price is more likely to "bounce" off this level rather than break through it. However, once the price has passed ABOVE this level, by an amount exceeding some noise, it is likely that it will continue rising until it finds another resistance level and the old resistance becomes support level.

Proactive support and resistance methods are 'predictive' in that they often outline areas where price has not actually been. They are based upon current price action that through analysis has been shown to be predictive of future price action. Proactive support and resistance methods include Measured Moves, Swing Ratio Projection/Confluence (Static (Square of Nine), Dynamic (Fibonacci)), Calculated Pivots, Volatility Based (Bollinger Bands), Trend lines/Channels and Moving averages, VWAP, Market Profile (VAH, VAL and POC).

Reactive support and resistance are the opposite: they are formed directly as a result of price action or volume behavior. They include Volume Profile, Price Swing lows/highs, Initial Balance, Open Gaps, certain Candle Patterns (e.g. Engulfing, Tweezers) and OHLC.

A price histogram is useful in showing at what price a market has spent more relative time. Psychological levels near round numbers often serve as support and resistance. More recently, volatility (Bollinger Bands) has been used to calculate potential support and resistance.

Most commonly used are Price Swing low and highs, Trend Lines, Channels, Moving Averages, Fibonacci Retracements, Swing rules, Psychological Level, Bollinger Bands, Candle Patterns (gaps, tweezers, engulfing).

When prices are above a gap they act as strong support, and when prices are below a gap they act as strong resistance. Also, moving averages act as "key supports" and "key resistance" zones. So when the price retreats to a MA it will bounce back up off it, so you would add just above a MA. If no strong support is available on a pull back it would be best to pass on adding more.