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Support and Resistance

What is Support and Resistance?

The market doesn't follow a straight line. Instead, it fluctuates, creating highs and lows. This price movement forms levels that act like a safety net (support) when prices go down and a ceiling (resistance) when they go up. Each time the price reaches these levels, it tends to bounce back, creating new highs and lows.

What Creates Support and Resistance Levels?

Both support and resistance reflect a balance between buying and selling pressure, with prices bouncing between these zones.

  • Support is like the ground for the buying team. When the price falls to a certain level (support level), buyers see it as a good bargain and jump in, pushing the price back up. This is like the buying team digging in their heels and stopping the price from going any lower.

  • Resistance is like a wall for the selling team. As the price climbs, sellers are tempted to cash out at these higher prices (resistance level), which increases supply and pushes the price back down. This is like the selling team putting up a strong defense and preventing the price from going any higher.

Prices can act differently at support and resistance levels over time. Notice how the support level at point A transitioned into a resistance level at point D. This happens because when the price breaks through a support level, it suggests a shift in the balance of supply and demand.

  • Broken Support becomes Resistance: Once support is broken, buyers may be less likely to step in at that price point again, turning it into a potential selling zone (resistance).

  • Testing vs Breaking: Not every touch of a support or resistance level is a true break. Sometimes, the price might dip below support or rise above resistance briefly, only to reverse course. These could be instances of the market simply testing those levels.

The more times a price tests a support or resistance level without breaking through, the stronger that level becomes. This signifies a greater concentration of buyers or sellers at that price point, making it more likely to hold in the future.

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