Support & Resistance Levels.

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Support and Resistance are technical terms used to identify prices at which a security might be likely to attract additional buyers or sellers. Learn how investors can use the concept of support and resistance to help decide what price it might be advantageous to buy or sell a security.

Definition of Support & Resistance Levels.

Technical analysis is the study of the price history of securities. It is used most often on liquid assets like high-volume stocks, indices or cryptocurrencies that have readily accessible price data, and is usually practiced by viewing and annotating price charts of those securities over different time periods. Through different types of technical analysis, investors and traders may be able to identify opportunistic buy or sell points.

Technical analysis involves studying previous price and volume statistics with the goal of uncovering optimal buy or sell points that may have been previously exhibited or which can be predicted from past data. While there are never any guarantees on what a stock will do next, this type of analysis is done to gain more information.

As securities oscillate in price over time, they can sometimes establish price points where an excess of buying or selling has occurred. The concept of "support" is based on the notion that there is thus a price that buyers consider attractive to purchase the security at. The concept of "resistance" is the price level at which buyers become reluctant and sellers tend to exit.

In the typical sine wave pattern exhibited by many stocks over time, support levels would coincide with the wave troughs and resistance would coincide with wave peaks. It is important to point out that as stocks or other securities steadily rise or fall over longer periods, support and resistance prices will change, rendering them a short-term tool at best.

Support & Resistance in Trading;

Identifying a support or resistance price can provide an investor with a potentially attractive price target for purchasing or selling a security. If, for example, an investor has owned a stock for some time and is looking to sell, a recent resistance price level may represent an attractive sell point if the stock trades up to that price again. Some investors will use such price targets to place their buy or sell orders.

Short-term or swing traders can use support and resistance levels to plan entry and exit trading objectives. If a stock has been trading between say $40 (support) and $50 (resistance), and the trader is able to buy shares near $40, they may be able to set a target price to sell near $50.

How to REad Support & Resistance Lines;

Below are three different ways to interpret support and resistance from price graphs:

• Horizontal support and resistance: This describes situations where securities may tend to trade up and down in a sideways price range until a break occurs at which point a new range is established.
• Trend support and resistance: This occurs when a security is trending up or down in a price channel that may provide support and resistance within the trend.
• Stepped support and resistance: This describes situations where a security will trade in horizontal steps that adjust up or down to form a longer-term trend.

When Resistance & Support Breaks;

The general assumption with support and resistance levels is that, when they break (either up or down), investors will abandon their support or resistance at that price level and look to establish new ones. That causes the security to continue its price momentum in the direction of the break until a new price range or trend is established. In other words, support and resistance levels are assumed to be erased once they are broken and new ones are likely to be established.

Cautions About Support and resistance Strategies;

It is important to recognize that support and resistance prices are not exact and should therefore serve as a guide rather than a precise strategy. Investors should also keep in mind the following facts regarding support and resistance:

• There is no single way of determining support or resistance levels. Different approaches will yield different results.
• At best, support and resistance are short-term indicators and they change frequently.
• There is no conclusive evidence about whether consistent support or resistance levels can accurately be determined for any security.
• Even if a stock exhibits a reliable support or resistance level, such levels tend to weaken or be broken in the long run.
• Price levels that are popularly recognized as support or resistance on charts may result in individuals competing against a large number of investors and traders at optimum price levels.

Bottom Line;

Support and resistance levels are easy-to-understand concepts that can aid investors in determining potential buy and sell points for their securities. While not an exact science, a consistent approach may help provide target prices for entries or exits and could help to identify opportunistic trades.