Getting Started Building a Trading Career Tools and Resources Glossary - Backtesting
- Backtesting Depth
- Bear Market
- Bull Market
- Candlestick
- Charting
- Chart Patterns
- Day Trading
- Dividend Yield
- ETF
- Fundamental Analysis
- Leverage
- Limit Order
- Index Fund
- Margin Trading
- Market Capitalization
- Mutual Fund
- Market Trends
- Moving Averages
- Price-to-Earnings Ratio (P/E Ratio)
- Portfolio Diversification
- Positions in Prosperse
- Risk Management
- Scalping
- Short Selling
- Stock Alerts
- Stock Scanning
- Stock Screener
- Stop-Loss Order
- Support and Resistance
- Swing Trading
- Take Profit
- Technical Analysis
- Trend Lines
- Volatility
Glossary - Support and Resistance
Support and Resistance definition
Price levels where a stock's price tends to stop falling (support) or rising (resistance) due to supply and demand dynamics.Support and resistance levels are key concepts in technical analysis that represent price points where a stock or asset tends to reverse or stall. Support is a price level where the asset finds buying interest strong enough to prevent further decline, while resistance is where selling pressure is strong enough to stop further price increases.
Use Cases
Traders use support and resistance levels to identify potential buy or sell points. For example, if a stock repeatedly bounces off a support level, it might be a signal to buy. Conversely, if it fails to break through resistance after multiple attempts, it could indicate a good time to sell. Traders often look for breakouts, where the price breaks through these levels, as potential signals of strong future price movement.
Historical Context
The concept of support and resistance has been a foundational part of market analysis since the early days of technical analysis. Traders have long used these levels to gauge the strength of price movements and predict potential reversals. Over time, tools like trend lines and moving averages have been incorporated into this analysis to provide a more comprehensive view of price action.
Visual Aid
The image below illustrates a stock chart with clearly defined support and resistance levels. The support level shows where buyers have consistently stepped in, while the resistance level highlights where sellers have prevented further price advances.
Related Terms:
- Trend Lines: Diagonal lines drawn on a price chart to represent the direction of price movements.
- Chart Patterns: Recurring patterns in price charts that traders use to predict future price movements.
- Moving Averages: A technical analysis tool that smooths out price data to identify trends over a specific period.
Frequently Asked Questions
What are support and resistance levels?
Support is a price level where a stock or asset tends to find buying interest, preventing further decline. Resistance is a price level where selling pressure prevents further price increases.
How do traders use support and resistance?
Traders use support and resistance levels to identify potential buy and sell points. Bouncing off a support level may signal a buying opportunity, while hitting resistance could indicate a selling point. Breakouts can indicate stronger price moves.
What is a breakout in relation to support and resistance?
A breakout occurs when the price of an asset moves above resistance or below support. Breakouts can signal a significant change in market momentum and are often used as trade entry or exit points.
