What is Trading? What is support resistance with examples?
Title: Understanding Trading and The Concepts of Support and Resistance
Introduction
Trading, in its simplest form, is just an exchange of goods or services. In the universe of finance, however, it takes a broader dimension as it heavily involves speculating on the price movements of various financial instruments. Additionally, an important aspect of trading is acquainting with the crucial technical phenomena known as support and resistance. Today, we will delve into the world of trading and explore this concept through tangible examples.
What is Trading?
1. [Insert Picture of Trading]
Trading involves buying, selling or exchanging goods or services, typically with the anticipation of earning a profit. The trading that we are interested in here involves financial instruments like stocks, bonds, commodities, currencies, derivatives, or cryptocurrencies. Typically, traders seek to capitalize on the price fluctuations of these assets over various time frames.
For instance, a stock trader might buy a certain stock intending to sell it later when its price increases. In contrast, some modern traders might even opt for short selling, where they sell a stock they do not own when they anticipate its price to fall, aiming to buy it back later at a lower price to profit from the difference.
Understanding Support and Resistance
The concepts of support and resistance are technical analysis tools that traders use to better understand price trends and make informed decisions.
Support refers to a price level where a downtrend is expected to pause due to a concentration of demand. As the price of an asset drops, demand for the asset increases, establishing a support level. If the price drops below a support level, then the market will expect further declines in price.
2. [Insert Image of Support]
For example, in the graph above, the bottom line represents the support level. The stock price seems to bounce back each time after hitting this line, indicating strong buying interest at those points. The traders expect the price to start rising after touching the support, thus, creating a suitable opportunity to buy.
On the other hand, resistance refers to a price level where an uptrend is expected to pause due to a concentration of supply. When the price of an asset rises, more traders are willing to sell the asset, which leads to a price drop.
3. [Insert Image of Resistance]
In the given graph, the top line indicates a resistance level. Every time the stock price touches this line, it starts to fall, signifying that the selling pressure at this level is high. Here, experienced traders might sell their holdings expecting a price drop or even start ‘short-selling.’
Applied together, support and resistance levels form a key tool that traders use to identify entry and exit points in their trading strategies.
Conclusion
Successful trading requires comprehensive knowledge and application of various technical tools, among which support and resistance are indeed significant. Understanding these concepts helps traders make more informed decisions, thereby enhancing their chances to secure profits. However, trading is a high-risk game, and one must bear in mind that these tools don’t guarantee profitability but merely improve the probability.
