Support and resistance are important terms to understand in technical trading. They refer to areas in price that stocks, securities, indexes etc. will react to and represent key points where the forces of supply and demand meet. As you know, prices are driven down by excessive supply and up with increased demand. Supply and demand is the point the price will move to then stop and reverse at certain price levels.
Support and resistance act as the walls that the price will hit and then reverse. When support or resistance areas are broken, they normally become the opposite of what they were. For example: If a support level is broken, it will then become a resistance level. If a resistance level is broken, it will become a support level.
What is Resistance?
A resistance level is the opposite of a support level. It is where the price tends to find resistance as it is going up. This means the price is more likely to “bounce” off this level rather than break through it. It’s the price level at which selling is thought to be strong enough to prevent the price from rising further. Supply overcomes demand.
What is Support?
A support level is where the price tends to find “support” as it is going down, that is, the price level at which demand is considered strong enough to prevent the price from declining any further and where the price will bounce off of and reverse rather than break through. In terms of supply and demand, as the price moves down towards support and gets less expensive, buyers become more interested in buying and sellers become less interested in selling. When the price reaches the pre-determined support level, logic implies that demand will prevent the price from falling below support. Of course, that’s not always the case. If a price falls through floor, a new support level will need to be set.
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