Support and Resistance
Quick Definition
Key price levels where buying pressure (support) prevents further decline or selling pressure (resistance) prevents further advance.
Key Takeaways
- Support is a price floor where buying prevents further decline; resistance is a ceiling where selling prevents further advance
- When support breaks, it often becomes resistance (and vice versa) — this is called role reversal
- Stronger levels have been tested multiple times, have high volume, and are recent
- Support/resistance analysis is foundational to breakout, range, and trend trading strategies
What Is Support and Resistance?
Support and resistance are among the most fundamental concepts in technical analysis. Support is a price level where a downtrend can be expected to pause or reverse due to a concentration of buying interest — it acts as a "floor" for price. Resistance is a price level where an uptrend can be expected to pause or reverse due to a concentration of selling interest — it acts as a "ceiling" for price. These levels form because of market psychology and memory: traders remember previous price points where significant reversals occurred and place orders accordingly. Support and resistance can be identified through previous price highs and lows, trendlines, moving averages, Fibonacci retracement levels, round numbers, and volume profiles. A key principle is role reversal: when a support level is broken, it often becomes resistance, and vice versa. The strength of a support or resistance level increases with the number of times it has been tested, the volume traded at that level, and the recency of the level's formation. Support and resistance analysis forms the foundation for many trading strategies including breakout trading, range trading, and trend following.
Support and Resistance Example
- 1A stock bounces off the $100 level three times over two months — this establishes $100 as strong support. Traders place buy orders near $100 expecting another bounce.
- 2After breaking above $50 resistance with high volume, the stock pulls back to $50 which now acts as support (role reversal), providing an entry opportunity.
Related Terms
Breakout
A price movement where a security moves above a resistance level or below a support level on increased volume, often signaling the start of a new trend.
Trend Line
A diagonal line drawn across price highs or lows to identify the prevailing trend direction and potential support/resistance.
Pivot Points
Calculated support and resistance levels derived from the previous session's high, low, and close, widely used by day traders and floor traders.
Supply and Demand Zones
Price areas on a chart where significant buying (demand) or selling (supply) previously occurred, expected to cause price reactions when revisited.
Fibonacci Retracement
A technical tool using horizontal lines at Fibonacci ratios (23.6%, 38.2%, 50%, 61.8%) to identify potential support/resistance levels.
Moving Average
A calculation that averages a security's price over a specific number of periods, smoothing price data to identify trends.
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