In trading, we often draw various lines, such as horizontal lines at highs and lows, trend lines, neckline, channel (track) lines, hundred percent lines, etc. The purpose of drawing these lines is to visually see whether these lines provide support or resistance when the price approaches them. So how are support and resistance levels formed? Intuitively, when the market rises or falls to a certain price level, there is a pause, or even a reversal occurs.
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What is the intrinsic reason for the formation of support and resistance levels? We will illustrate this using support levels as an example. The intrinsic reason for the formation of a support level is that when the price drops to a certain price range (support and resistance levels are not an exact price, but rather a range that fluctuates around a price), most investors believe that this price range is too low, and many buyers think it is profitable to enter a long position at this time, thus resulting in a situation where buying power exceeds selling power, leading to the inability of the price to continue falling. Due to the strong buying power, the price subsequently rebounds or reverses, which also serves as a protection against the downward trend. The intrinsic reason for the formation of resistance levels is exactly the opposite.