Support and resistance
Support and resistance” is a general concept referring to key levels on a price chart that have historically shown significant importance because they influence price movements.
Support refers to a level or area on the price chart where the price typically stops falling and starts to bounce back up. It signifies strong buying interest and a higher likelihood of price rebounding.
Resistance refers to a level or area on the price chart where the price usually stops rising and begins to decline. It signifies strong selling interest and a higher likelihood of price dropping.
After introducing support and resistance, we’ll discuss specific examples known as support levels and resistance levels.
Support level and resistance level
A support level is like a “floor” on a price chart. It’s a specific price point or range where, historically, the price tends to stop falling and starts to bounce back up. Think of it as a level where there are buyers in the market who are willing to purchase the asset at that price. Imagine that when the price drops to a certain point, it’s as if it hits the floor and then bounces back up.
A resistance level is like a “ceiling” on a price chart. It’s a specific price point or range where, historically, the price tends to stop rising and starts to move back down. It’s where there are sellers in the market who are willing to sell the asset at that price. Think of it as when the price rises to a certain point, it’s as if it hits the ceiling and then reverses back down.
Example
To better understand, let’s consider a simple example. Suppose you’re looking at the price chart of a stock. Every time the price of that stock drops to $50 (support level), you notice that it seems to stop falling and starts to rise again. This $50 price level is the support level. Conversely, every time the stock’s price rises to $60 (resistance level), you observe that it seems to stop rising and starts to fall. This $60 price level is the resistance level.
Support and resistance levels are essential reference points for investors and traders. When the price approaches a support level, some may consider buying, expecting a bounce. On the other hand, when the price approaches a resistance level, some may consider selling, anticipating a drop. These concepts help you better understand market behavior and make wiser trading decisions.
In addition， we need to know what influences support and resistance to change.
Impact issue
The formation and influencing factors of support and resistance levels involve various market dynamics and psychological factors. Here are the main influencing factors for support and resistance levels:
Supply and Demand Dynamics:
- Influence: Support levels are formed when buying interest exceeds selling interest, while resistance levels are formed when selling interest exceeds buying interest.
- Example: Suppose a company’s stock price consistently bounces back near $50 because whenever the price drops to $50, investors are willing to buy. This buying interest drives the price up, creating a support level.
Psychological Key Points:
- Influence: Psychological key points in price levels, such as round numbers, often capture investor attention and may become support or resistance levels.
- Example: When the price of a commodity rises to $100, investors may become anxious as it represents a psychological key point and could act as a resistance level.
Historical Price Behavior:
- Influence: Support and resistance levels often reflect past price behavior, especially in areas where prices have reversed.
- Example: If the price of a commodity has repeatedly risen to $100 in the past year and then declined, the $100 level may become a resistance level because historically the price has stopped rising here.
Role Reversal:
- Influence: Support levels may become resistance levels after being breached, and vice versa.
- Example: A stock’s price breaks above a resistance level at $60 and starts to rise. In this case, $60 may become a support level in the future because investors might anticipate the price to retrace to this level.
Trading Volume:
- Influence: Higher trading volume near support and resistance levels can increase the reliability of these levels.
- Example: When the exchange rate of a currency pair approaches a historical support level accompanied by high trading volume, it may indicate strong market attention to that support level, potentially increasing its effectiveness.
News and Events:
- Influence: Major news events or market changes can lead to the breakout or strengthening of support and resistance levels.
- Example: A company releases disappointing quarterly earnings, causing the stock price to break below a support level. This could be due to the impact of negative news.
End
And there you have it – the world of support and resistance in trading. These levels are essential pillars shaped by various factors.
Remember, trading isn’t just about spotting these levels; it’s about using them wisely in your strategies, considering market forces’ impact.