Support and Resistance – An introduction

In financial markets support refers to the price at which price has come down but will go no lower and resistance is the price at which price goes up to but can go no higher. If we look at different time frames we will find that support and resistance also applies to each time frame we are looking at. And if we apply the support and resistance of the different time frames on the same chart there are areas of overlap which are called convergences.

These area of support and resistance can be visualized on a chart and represent the turning points at which price goes to and then turns from to go in the other direction. These price points are also called pivot points. The question is: Can they be determined ahead of time to make trading decisions on? Well let us test this idea and find out. Below is a 20 day chart of 4 hour time periods which I have drawn a line across to illustrate support and resistance. You can see that there is a pivot point slightly above the 1330 area. Also note that once a support has been broken to the downside that it serves as resistance to an upside trend. This resistance must be crossed for the trend to change to an uptrend. This is a line in the sand. Click chart to enlarge.

There are mathematical formula for the pivot points as follows: Let P = price, H = high price for that time frame under consideration, L = low price for that time frame, and C = closing price for that time frame, and R1, R2, S1, and S2 are the respective support and resistance levels, then

P = (H + L + C) / 3
R1 = (P x 2) – L
R2 = P + H – L
S1 = (P x 2) – H
S2 = P – H + L

In the days ahead I shall make a calculator for these levels for the daily, week, monthly and convergence levels.