What is Support and Resistance?
What Does Support Mean?
A support level is the price at which buyers are expected to enter the market in sufficient numbers to take control from sellers. The market has a memory. When price falls to a Low and then rallies, buyers who missed out on the first trough will be inclined to buy if price returns to that level. Afraid of missing out for a second time, they may enter the market in sufficient volume to take control from sellers.
The more times a stock falls to the level of support and bounces off it, the more significant (stronger) the price level becomes.
What Does Resistance Mean?
Resistance in a sense is the opposite of support. Resistance is a price level on a chart where historically the stock has had difficulty rising above. This price level acts as a ceiling and prevents the stock from rising any further.
A resistance level is created at a point where “selling pressure” exceeds buying pressure and the rally in stock price is halted.
Some support and resistance lines are more important than others. The significance of the level depends on the following factors:
- The number of times the level has been tested. The more it has been tested the stronger it becomes in holding the stock back.
- The amount of volume that has been traded near the level, the higher the volume the more traders are participating in the move.
- Whether the level is old or new, more recent levels have greater importance.
- Whether the level is a new High or new Low, more extreme levels have greater impact.