Support and Resistance

Support and resistance are two fundamental concepts in technical analysis, widely used by traders to predict potential price movements and identify key levels in the market. These levels help traders make informed decisions about when to enter or exit trades.

Support is a price level at which a downtrend can be expected to pause or reverse. It acts as a "floor" in the market, where the price tends to find buying interest and stops falling.

In other words, when the price is declining and reaches a support level, buyers usually step in and prevent the price from going lower. Support levels are usually identified at price points where the price has previously bounced higher multiple times.

For example, the price of a stock has fallen to $50 three times in the past, but each time it reached this level, the price reversed and moved higher. In this case, $50 acts as a support level.

Resistance is a price level at which a trend reversal is likely to occur after an uptrend. It acts as a "ceiling" where selling interest is strong enough to stop the price from rising higher.

When the price reaches a resistance level, sellers often enter the market, and the price tends to reverse or stall. Resistance levels are typically identified where the price has failed to break through multiple times in the past.

As an example, if the price of a stock has tried to rise above $100 multiple times but has always fallen back down after reaching that level, $100 becomes a resistance level.

Support and resistance levels are directly tied to the dynamics of supply and demand in any market. These levels are formed as a result of buyers (demand) and sellers (supply) interacting at specific price points.

These levels help traders identify potential entry and exit points, manage risk, and predict market movements. Recognizing these levels allows traders to make more informed decisions, set stop-loss orders, and maximize potential gains in both trending and range-bound markets.