What is Support and Resistance?
Support and resistance is a concept in technical analysis, which is essential to understand in order to master reading price trends and pattern charts.
–> What is Resistance?
Example – Assume that Bob has been holding shares in Microsoft for 2 months and notices that, during that time period, its price had failed to pass $25 several times. However, he also notices the price has gotten very close to moving above $25. In this example, the price level near $25 is a level of resistance. If the price were to rise above $25, there would be a break in the resistance.
As you can probably assume from the example above, resistance refers to the price at which a stock trades, but not exceed past, for a period of time. The stock stops rising and does not break resistance because sellers start to outnumber buyers.
In other words, this resistance price level occurs when selling is sufficient enough to disrupt or reverse an uptrend. It is represented on a chart by a horizontal line that connects several tops, signifying that sellers are overpowering buyers. Resistance is also regarded as a ceiling because its price level prevents the prices from moving up and past it.
When the price reaches the resistance level, supply is believed to be stronger than the demand, which means that it is preventing the price from rising above the resistance. However, resistance does not always hold and when it breaks, it signals that the bulls have beaten the bears in that fight, creating new highs.
–> What is Support?
The support price level occurs when buying is sufficient enough to disrupt or reverse a downtrend. It is represented on a chart by a horizontal line that connects several bottoms, signifying that buyers are overpowering sellers. Support is also regarded as a floor because its price level prevents the prices from falling below it.
Support explains the trading rule not to buy into a falling price. If support is penetrated, price may fall far before it finds new support. The old support price will have become the new resistance, so recovery is by no means assured.
Resistance explains the trading rule to always take some of your profits off the table. If resistance holds, prices that have climbed near resistance may fall back. Further profit is not assured, so it makes sense to book at least some profits as major resistance nears.