stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, as ...

technical analysis In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis use many of the sam ...

, support and resistance are certain predetermined levels of the price of a

security Security is protection from, or resilience against, potential harm (or other unwanted coercive change) caused by others, by restraining the freedom of others to act. Beneficiaries (technically referents) of security may be of persons and social ...

at which it is thought that the price will tend to stop and reverse. These levels are denoted by multiple touches of price without a breakthrough of the level.

Support versus resistance

A support level is a level where the price tends to find support as it falls due to an increase in demand for the asset. This means that the price is more likely to "bounce" off this level rather than break through it. However, once the price has breached this level, by an amount exceeding some noise, it is likely to continue falling until meeting another support level. A resistance level is the opposite of a support level. It is where the price tends to find resistance as it rises due to an increase in selling interest. Again, this means that the price is more likely to "bounce" off this level rather than break through it. However, once the price has breached this level, by an amount exceeding some noise, it is likely to continue rising until meeting another resistance level.

Reactive versus proactive support and resistance

Proactive support and resistance methods are "predictive" in that they often outline areas where price has not actually been. They are based upon current price action that, through analysis, has been shown to be predictive of future price action. Proactive support and resistance methods include Measured Moves, Swing Ratio Projection/Confluence (Static (Square of Nine), Dynamic (Fibonacci)), Calculated Pivots, Volatility Based, Trendlines and Moving averages, VWAP, Market Profile (VAH, VAL and POC). Reactive support and resistance are the opposite: they are formed directly as a result of price action or volume behaviour. They include Volume Profile, Price Swing lows/highs, Initial Balance, Open Gaps, certain Candle Patterns (e.g. Engulfing, Tweezers) and OHLC. A price histogram is useful in showing at what price a market has spent more relative time.

Psychological level In finance, psychological level, is a price level in technical analysis that significantly affects the price of an underlying security, commodity or a derivative. Typically, the number is something that is "easy to remember," such as a rounded-off ...

s near round numbers often serve as support and resistance.

Identifying support and resistance levels

Support and resistance levels can be identified by

trend lines (technical analysis) In finance, a trend line is a bounding line for the price movement of a security. It is formed when a diagonal line can be drawn between a minimum of three or more price pivot points. A line can be drawn between any two points, but it does not q ...

. Some traders believe in using pivot point calculations. The more often a support/resistance level is "tested" (touched and bounced off by price), the more significance is given to that specific level. If a price breaks past a support level, that support level often becomes a new resistance level. The opposite is true as well; if price breaks a resistance level, it will often find support at that level in the future. Psychological Support and Resistance levels form an important part of a trader's technical analysis. As price reaches a value ending in 50 (ex. 1.2050) or 00 (ex. 1.3000), people often see these levels as a strong potential for interruption in the current movement. The price may hit the line and reverse, it could hover around the level as Bulls and Bears fought for supremacy, or it may punch straight through. A trader should always exercise caution when approaching 00 levels in general, and 50 levels if it has previously acted as Support or Resistance.

Using support and resistance levels

This is an example of support switching roles with resistance, and vice versa: If a stock price is moving between support and resistance levels, then a basic investment strategy commonly used by traders, is to buy a stock at support and sell at resistance, then short at resistance and cover the short at support as per the following example: When judging entry and exit investment timing using support or resistance levels, it is important to choose a chart based on a price interval period that aligns with your trading strategy timeframe. Short term traders tend to use charts based on interval periods, such as 1 minute (i.e. the price of the security is plotted on the chart every 1 minute). Longer term traders typically use price charts based on hourly, daily, weekly or monthly interval periods. Typically traders use shorter term interval charts when making a final decisions on when to invest, such as the following example based on 1 week of historical data with price plotted every 15 minutes. In this example, the early signs that the stock was coming out of a downtrend was when it started to form support at $30.48 and then started to form higher highs and higher lows. This signals a change from negative to positive trending. BiometSupportLevelInvestmentTimingChart

Support versus resistance

Reactive versus proactive support and resistance

Identifying support and resistance levels

Using support and resistance levels

See also

References

Further reading