Support and resistance are two important concepts in technical analysis that traders use to refer to price levels on charts that act as barriers to the price of an asset from getting pushed in a certain direction. Here are some key points about support and resistance in the stock market:
Support
- Support is the level at which demand is strong enough to stop the stock from falling any further.
- It is an area on a price chart that shows buyers’ willingness to buy, and it is at this level that demand will usually overwhelm supply, causing the price decline to halt and reverse.
- As the price drops and approaches support, buyers (demand) become more inclined to buy and sellers (supply) become less willing to sell.
Resistance
- Resistance is the level at which supply is strong enough to stop the stock from moving higher.
- It is the opposite of support, and prices move up because there is more demand than supply. As prices move higher, there will come a point when selling will overwhelm the desire to buy.
- As the price rises and approaches resistance, sellers (supply) become more inclined to sell and buyers (demand) become less willing to buy.
Psychology of support and resistance
- Market psychology plays a major role as traders and investors remember the past and react to changing conditions to anticipate future market movement.
- Support and resistance areas can be identified on charts using trendlines and moving averages.
- Once a support level is broken, it can turn into resistance, and vice versa.
- Support and resistance levels can help traders gain extra insight into the strength of a price trend, and they can be used to manage risk and place stops, determine the market conditions, and find appropriate entry and exit positions.
In summary, support and resistance levels are important points in time where the forces of supply and demand meet, and they can be used to identify price points on a chart where the probabilities favor a pause or reversal of a prevailing trend.
