Figure 1: Support and resistance

As seen in Figure 1, we draw the best-fit horizontal straight line touching most of the candlesticks at their lows. This price level shows that traders are unwilling to let the price drop any further and this defines the support price level. To determine the resistance level, we draw the best-fit horizontal line touching most of the candlestick near their highs. For the case of Celestial as illustrated in Figure 1, the support level is found to be at $1.53 while the resistance level is found to be at $1.62. The trick is to draw conservatively. The trick to drawing an effective support line is to find the level where most of the candlestick lows are. This is because every candlestick low is a psychological price support in nature. Similarly, we get the most effective resistance line by finding the line that connects most of the candlestick highs. Effectiveness here is measured by the probability that during a retracement either the support and the resistance line is going to be tested and consequently provide a chance for the trader to enter a trade.

The second consideration is the time factor. The best range is one with duration of at least a few months old. This is because by the very human nature, investors and traders always remember those key turning points. Hence whenever a support level is re-visited, most traders will remember that price level was supported and would buy. Their buying result in the price holding well at support and more market participants will be tempted to do the same. The same goes for resistance. When the price is unable to trade above a particular price for a period of time, the next time the price trades at this price, many traders and investors will remember how the price retraced and the fear of getting caught will see many liquidating their position at this resistance. Their selling action will result in the price not able to close above the resistance and induce more market participants to do the same.