Understanding Support and Resistance: All about Apples and Oranges

ApplesRelated article: When Expensive becomes Cheap: Resistance Turn Support

You’re a huge apple fan and you’ve been buying apples from a specific fruit stall for the past 12 months. During the peak apple season, apples are in abundance and they cost in the region of £0.50 each. In the off peak season, when apples are harder to source, the price would rise to £0.75.

If the price rose above £0.75 buyers would choose to buy oranges instead, leaving the seller with no choice but to drop his prices very quickly or he would risk not selling any at all. On the other hand, if the price fell below £0.50, buyers would snap them up and that batch of lower priced apples would disappear fast.

This just means that, you (the buyer) would be reluctant to pay for an apple if the price rose above £0.75 and the seller would not sell any apples below £0.50. Hence, the price of apples continues to range between £0.50 and £0.75.

If we plot apple prices over a period of 12 months on a chart for that seller, the following should be an approximate of what you would expect to see:

(Click on image for Larger View)

Support and Resistance

In this scenario, £0.50 is known as the price support level and £0.75 is known as the price resistance level.

As you can see, support and resistance levels are nothing more than psychological price levels that buyers and sellers react to subconsciously. As traders, we need to be aware of them and take relevant action when price reaches these levels.

While this is a simplified example of price levels, the reality is that market price action is not any more complicated.

If you like this article, then make sure to check out the Market Apprentice online courses. This is the typical approach I use when teaching. 

Thank you for taking time to read this and happy trading.

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