Support and resistance are levels on a price chart that act as barriers or zones where the price of an asset tends to stop, reverse, or experience a significant amount of buying or selling pressure.

Support is a price level at which demand for an asset is strong enough to prevent the price from falling further. It is like a floor that supports the price and prevents it from declining. When the price approaches a support level, buyers tend to enter the market, causing the price to bounce back up. Support levels can be identified by looking for previous lows or areas where the price has historically found buying interest.

Resistance is a price level at which selling pressure becomes significant enough to prevent the price of an asset from rising further. It is like a ceiling that caps the price and prevents it from moving higher. When the price reaches a resistance level, sellers tend to enter the market, pushing the price back down. Resistance levels can be identified by looking for previous highs or areas where the price has historically encountered selling pressure.

Support and resistance levels can be visualized on a price chart using horizontal lines or trendlines. Traders and investors use these levels to make trading decisions. For example, a trader may decide to buy near a support level with the expectation that the price will bounce back up. Conversely, a trader may decide to sell or short-sell an asset near a resistance level, anticipating that the price will reverse and move lower.

It's important to note that support and resistance levels are not precise points but rather zones or areas where price action tends to react. Prices can break through support or resistance levels, indicating a potential change in the market sentiment. In such cases, the broken support level may become a new resistance level, and a broken resistance level may turn into a new support level.

Support and resistance levels are widely used in technical analysis as they provide insights into market psychology and can help identify potential entry and exit points for trades.

There are four types of indicators:

Moving averages are lagging trend indicators. Lagging indicators use data that already occured in the past. Meaning, the indicator will always lag behind the current real time data.

There are various kinds of moving averages:

The moving average looks at a certain period of time and it calculates the price average. The various types of averages are using various formulas. Don’t worry, you don’t have to memorize any formula. All moving averages are calculated automatically by basically every charting software you use. But it’s good to know how moving averages are actually calculated.

Simple moving average

SMA is calculated by summing up the price closures of the selected period. The price is then divided by the selected period. For example, when using the 21 day moving average you sum up all the closing prices for each day and divide that by 21. The result is a line on the chart representing the average. Because it’s an average in the selected timeframe, the trend is always lagging.  An moving average looks like this on the chart:

Source: Tradingview.com

In this case, the blue line represents a 21 day moving average. Because the average is based on results from the past, the indicator will always lag behind. For example, when price would suddenly go up, the moving average won't immediately follow. 

All other moving averages discussed below look the same on the chart. The only difference is that the line will move in different directions based on the maths behind the used indicators and the amount of days used to determine the average.

Exponential moving average

The EMA gives more weight to the latest closing prices by giving them more value in the equation. EMA is calculated by adding a certain percentage to the latest closing prices:

Where:

Smoothed moving average

A smoothed moving average is an exponential moving average with a long lookback period. Older prices are reduced in weight but are never left out in the calculation. Unlike SMA and EMA where prices are removed when they are beyond the selected period. SMMA is a combination of the SMA and EMA. The main advantage is that it smooths out fluctuations in price. 

Linear weighted moving average

The LWMA gives the latest price the highest weight and then lineary scales down with each price before that. The result is that the LWMA reacts quicker to changes in price than the SMA or EMA. The formula:

Where:​

Moving averages are widely used by many traders. Which moving average you need depends on your trading strategy. Common practise is using a combination of multiple periods. For example, the EMA21, EMA50, EMA100 and EMA200. How does that look on a chart:

 

Source: Tradingview.com

The lowest (purple) line on the chart represents the EMA200 then following up the EMA100, EMA50 and EMA21. 

You can use moving averages to determine a trend. The 200 moving average is mostly used as a baseline for determining the current trend:

This is not set in stone. Most trading strategies use multiple moving averages each with different settings. While one strategy might use the EMA20, the other uses the SMA21. There can be hundreds of different variations. Moving averages can also be used as support and resistance. More often than not, prices will bounce on moving averages.

There are four types of indicators:

MACD (Moving Average Convergence Divergence) is a lagging momentum indicator using two moving averages of the price. It turns two trend indicators (moving averages into a momentum indicator).

The formula is quite simple:

MACD can be used as a lagging trend indicator. MACD on the chart looks like this:

Source: Tradingview.com

The orange line represents the signal line and the blue line is the MACD. The green and red bars represent the MACD histogram. The histogram represents the difference between the nine day EMA (signal line) and MACD. The histogram turns positive (green) when the MACD is above the signal line and red when it’s below.

You should only use one or two trend indicators at the same time. There’s no point using the parabolic sar, EMA, SMA and MACD together because they all show the same thing. Stick to one depending on the strategy you are using.

What is the Directional Movement Index (DMI) Indicator?

The Directional Movement Index (DMI) is a tool traders use to see if a trend is strong or if the market is confused. It helps them figure out if prices are moving in a clear direction or if they're all over the place.

Market Psychology Behind the DMI Indicator

Think of the DMI like a guide for trend adventures. When it's high, it shows that a trend is probably happening, and when it's low, it might mean the market is unsure about where to go. Traders watch this to catch those moments when the trend is having a strong influence.

How Can You Use the DMI Indicator?

You can use the DMI to:

There are four types of indicators:

The parabolic SAR, or parabolic stop and reverse, is a lagging trend indicator. Meaning the indicator is lagging behind the current price data.

Original use

Parabolic SAR (stop and reverse) is a method developed by J. Welles Wilder Junior to find potential reversals in the market price direction. It's a lagging trend indicator and can be used to:

Use in tradingview

You can add the basic parabolic SAR in tradingview and it looks like this:

Source: Tradingview.com

The dots on the chart are the parabolic SAR. You can plot indicators in trading view by pressing the following button in the top of the screen:

If you type “parab” you’ll already see the trading view built in parabolic SAR. But you can also choose many variations other people make:

Source: Tradingview.com

You can even pick one that gives you alerts and everything. The parabolic SAR is displaying dots on the chart which indicate the following:

Important: Always use mutiple types of indicator before placing a buy or sell order. 

There are four types of indicators:

The RSI is a leading momentum indicator, meaning the signals are instant.

The RSI measures the magnitude of recent price changes to determine if the asset is overbought or oversold. 

Original usage

Keep in mind that almost every indicator can be used in different ways. Even beyond the orginal settings. The relative strength index was developed by J. Welles Wilder. Wilder recommended a smoothing period of 14 days. That means a 14 day moving average (read more about this setting below). Another quote from the wikipedia page:

"Wilder thought that "failure swings" above 50 and below 50 on the RSI are strong indications of market reversals.[6] For example, assume the RSI hits 76, pulls back to 72, then rises to 77. If it falls below 72, Wilder would consider this a "failure swing" above 70." 

Wilders also considers the RSI 50 line as both support and resistance. I recommend to always read the original settings first before using an indicator. Many traders and websites are using their own version of the indicator which might be confusing. 

How you can use RSI (Divergence)

First and foremost, there is no real right or wrong usage of the RSI indicator. You can use it in any way you want. Wilder recommends using a 14 day average but you can make it 50 or 100 if you like. Just keep in mind that using an indicator is just part of a larger trading plan. In other words, it’s not recommended to do any trading or investing based on a single indicator like the RSI.

The RSI is measured on a scale between 0 and 100. From 30 till 0 is considered oversold. and from 70 -100 is overbought. The RSI is a leading indicator, meaning the signals are instant.

I like to use the RSI as a trend\momentum indicator and not as an overbought or oversold indicator. I use the middle (50) as the baseline. When prices go above RSI 50 the trend is bullish and can indicate long positions. When below 50 it is considered bearish and can indicate short positions. Other traders use the 70 and 30 levels as overbought/oversold depending on the used strategy. The RSI indicator looks like this:

Source: Tradingview.com

The general concensus is that an RSI above 70 indicates that the security is overbought. In other words, the price this security is trading for is to high and should come down. So if RSI hits 70 or above this might indicate a sell signal or taking a short position (expecting the price will go down). Although RSI above 70 indicates the security is trading above it's fair value, that does not mean the price will go down.

Use tradingview to add indicators

I highly recommend using tradingview to add indicators to a chart. It has all the indicators you can think off and can add them for free (up to three indicators) to any chart you want. You can see that the levels 30 and 70 are marked with a dotted line. If you want you can remove these lines or give it another colour using Tradingview. You can also adjust the moving average used. You can also find RSI indicators made by the community that include other settings like RSI divergences.

RSI divergence

RSI is not only used to determine momentum but can also spot reversals or continuations of the trend. A reversal means that the trend is going in the opposite direction. From bullish to bearish or from bearish to bullish. These reversals can be spotted by looking at the price and the direction of the RSI. When the price is going up but the RSI is going down that means there is a divergence. This is also the case when RSI goes up but price is going down.

There are four types of divergences:

Regular bullish divergence

With a regular bullish divergence, the price is making lower highs but the oscillator (in this case the RSI) is making higher lows. A regular bullish divergence might indicate the end of the current trend. You’ll see regular bullish divergences mostly at the end of a downtrend. But that does not mean that every regular bullish divergence is a trend reversal.

Source: Tradingview.com

Regular bearish divergence

With a regular bearish divergence the price is making higher highs but the oscillator (in this case the RSI) is making lower highs. This might indicate the end of an uptrend.

Source: Tradingview.com

Hidden bullish divergence

With a hidden bullish divergence, the price is making a higher low while the RSI is making a lower low. This might indicate bullish trend continuation. 

Source: Tradingview.com

As you have noticed, you can have multiple divergences in a row.

Hidden bearish divergence

With a hidden bearish divergence, price is making lower highs but RSI is making higher highs. This might indicate bearish trend continuation.

Source: Tradingview.com

You can find many cheatsheets of RSI divergences online. Search for "RSI divergence overview" and you'll find a lot of examples. You can print these to learn the various types of divergences.

There are four types of indicators:

The Stochastic Oscillator is a leading momentum indicator, meaning the signals are instant. *

* Although some people consider it a lagging momentum indicator because it still uses prices from the past to determine momentum.

The stochastic oscillator is a momentum indicator comparing a certain price to multiple prices ranging over time. It is used to determine overbought and oversold areas much like the RSI.

The stochastic oscillator consists of two lines named K and D.

When these lines cross it might indicate a reversal. How does this look on the charts:

Source: Tradingview.com

There is also a stochastic RSI indicator. This indicator combines the stochastic formula with certain aspects of the RSI indicator. It also ranges from 0 -100. And just like the other two indicators, the stochRSI is also used to indicate overbought and oversold areas.

The stochRSI is more volatile than the stoch and RSI, generating more noise. It also creates more overbought and oversold areas. Due to this the stochRSI is not very reliable. But you can disable the K line and only use the D line to spot divergences. A divergence happens when the oscillator goes up or down while the price moves in the opposite direction. This could mean a trend reversal. You can find all divergences that happend for iShares € Govt Bond 15-30yr UCITS ETF EUR (Dist) when you exit this learning section.

How does the StochRSI look on the chart:

Source: Tradingview.com

Just like with all indicators, you can use them in various ways. But you should not use the stochRSI, RSI and MACD together on the same chart because they all show the same thing and will create extra noise.

If you want more information about the stochRSI check out investopedia. 

What is the Commodity Channel Index (CCI) Indicator?

The Commodity Channel Index (CCI) is a tool traders use to figure out if prices are acting kind of crazy or staying calm. It helps them see if things are going a bit extreme or staying steady.

Market Psychology Behind the CCI Indicator

Imagine the CCI like a mood meter for prices. When it's really high or really low, it might mean prices are acting strange and could change soon. Traders watch this to catch those moments when the market is in an unusual mood.

How Can You Use the CCI Indicator?

You can use the CCI to:

What is the Chande Momentum Oscillator (CMO) Indicator?

The Chande Momentum Oscillator (CMO) is a tool traders use to see if prices are getting all excited or if they're chilling out. It helps them figure out if the market is picking up speed or slowing down.

Market Psychology Behind the CMO Indicator

Think of the CMO like a fun speedometer for prices. When it's high, it means prices are going faster than usual, and when it's low, things are slowing down. Traders watch this to catch those moments when the market's pace is changing.

How Can You Use the CMO Indicator?

You can use the CMO to:

What is the Williams %R Indicator?

The Williams %R is a tool traders use to see if a stock or market is getting too high or too low. It helps them figure out if something might change soon.

Market Psychology Behind the Williams %R Indicator

Imagine the Williams %R like a roller coaster that shows if it's going up too fast or down too much. When it's high, it means things might be overbought (too expensive). When it's low, it could mean things are oversold (too cheap). Traders watch this to catch moments when the ride might slow down or change direction.

How Can You Use the Williams %R Indicator?

You can use the Williams %R to:

What are Bollinger Bands?

Bollinger Bands are a tool traders use to see if prices are likely to go up, down, or stay around the same. They're like boundaries that help you predict what might happen next.

Market Psychology Behind Bollinger Bands

Think of Bollinger Bands like a rubber band around prices. When prices stretch too far from the band, they might bounce back. Traders watch this to see if prices are really high or really low compared to usual, and that can affect how they make decisions.

How Can You Use Bollinger Bands?

You can use Bollinger Bands to:

What is the Average True Range (ATR) Indicator?

ATR (Average True Range) is a tool that traders use to see how much prices go up and down in a crazy way. It helps them figure out if the market is calm or if it's acting all wild.

Why Do Traders Use the ATR Indicator?

Traders like to know if the market is being chill or super energetic. When the ATR number is big, it means things are unpredictable, so they become more careful. When the ATR number is small, it's like the market is in a calm mood, so they feel more confident.

How Can You Use the ATR Indicator?

ATR helps traders:

What is the On-Balance Volume (OBV) Indicator?

The On-Balance Volume (OBV) is a tool traders use to see if more people are buying or selling a stock. It helps them figure out the strength of a trend and if it might change.

Market Psychology Behind the OBV Indicator

Think of the OBV like a scale that shows if more people are leaning towards buying or selling. When it goes up, it means more people are buying. When it goes down, more people are selling. Traders watch this to understand what most people are doing.

How Can You Use the OBV Indicator?

You can use the OBV to:

What is the Money Flow Index (MFI) Indicator?

The Money Flow Index (MFI) is a tool traders use to figure out if a stock or market is getting too popular or ignored. It helps them see if a lot of money is flowing in or out of a place.

Market Psychology Behind the MFI Indicator

Imagine the MFI like a popularity contest for stocks. When it's high, it means lots of people are excited and buying. When it's low, people might not care much, and they could be selling. Traders watch this to catch moments when the mood about a stock changes.

How Can You Use the MFI Indicator?

You can use the MFI to: