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
Support and Resistance
What is Support and Resistance?
Support and resistance are key concepts that help traders understand, analyze and act on chart patterns in the financial markets.
These terms refer to price levels on charts that tend to act as barriers, preventing the price of an asset from getting pushed in a certain direction.
At first, the explanation and idea behind identifying these levels seem easy, but as you'll find out, support and resistance can come in various forms, and the concept is more difficult to master than it first appears.
Here is an image to demonstrate support and resistance:
As you can see by the arrows, there are points where the stock has hit a specific level multiple times. These are the support and resistance levels.
By noting or drawing them on our chart, we can use them in the future to help us make trading decisions. If we see the stock come up to a level of resistance, we can use that as a signal to sell. If we see the stock come down to a level of support, we can use that as a signal to buy.
How do you identify Support and Resistance?
There are two main types of support and resistance:
- Horizontal
- Dynamic
Horizontal Support and Resistance
Horizontal support and resistance levels are not diagonal, but rather horizontal. These are the most common type of support and resistance.
These levels are denoted by multiple touches of price without a breakthrough of the level. The more times a level is touched, the more valid it becomes.
When the price approaches a support level, there are two scenarios: the price will either bounce back off the support level, or it will break the support level and continue to fall.
When the price approaches a resistance level, there are also two scenarios: the price will either bounce back off the resistance level, or it will break the resistance level and continue to rise.
Dynamic Support and Resistance
Dynamic support and resistance levels are not horizontal, but rather diagonal. These are less common than horizontal support and resistance levels, but they are still important to know.
These levels are denoted by trendlines or moving averages. The more times a trendline is touched, the more valid it becomes.
When the price approaches a trendline, there are two scenarios: the price will either bounce back off the trendline, or it will break the trendline and continue to fall.
When the price approaches a moving average, there are also two scenarios: the price will either bounce back off the moving average, or it will break the moving average and continue to rise.
