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6. Support & Resistance

You have probably heard that previous swing points, moving averages, trend lines and old tops and bottoms serve as resistance and support to price. This is somewhat true, but the reasoning behind this is important to understand.

  • Resistance to higher prices are sellers
  • Resistance to lower prices are buyers

Price will only "break" support or resistance when there no longer are buyers or sellers present there. With VSA, we can most of the time identify when support/resistance will hold and when it will not. Pretty cool isn't it ?

Sellers provide a supply, which needs to be absorbed before prices can move up, and buyers provide demand which will also need to be absorbed to move prices down. Is it to complicated to understand? Let me give you a simple example.

Let's say that you go every Friday to your local fruit market and buy apples. The apples cost 2€/kilo usually. One Friday, you come and see that there is a new fruit stand in the market. This new guy is selling Apples for 1€/kilo. Do you buy the 2€ Apples now? I hardly think so. So, for him to be able to sell his Apples again, he has only two choices:

  1. Lower prices and sell for 1€
  2. Wait for the new guy to sell of his supply of Apples

The same principals goes for any market, even the financial ones. When the supply has been absorbed, and there is no longer any supply left for lower prices, only then can price go up again. The new guy in the market serves as "resistance" to higher prices.