Support and Resistance 101
Support and resistance are two foundational concepts in technical analysis. Understanding what these terms mean and their practical application is essential to correctly reading price charts.
Prices move because of supply and demand. When demand is greater than supply, prices rise. When supply is greater than demand, prices fall. Sometimes, prices will move sideways as both supply and demand are in equilibrium.
Like many concepts in technical analysis, the explanation and rationale behind technical concepts are relatively easy, but mastery in their application often takes years of practice. S/R level areas can develop inside different candlestick patterns as well as trend trading patterns. The Resistance being the top of the pattern and the support being the bottom of it.
🔹Technical analysts use support and resistance levels to identify price points on a chart where the probabilities favor a pause or reversal of a prevailing trend.
🔹Support occurs where a downtrend is expected to pause due to a concentration of demand.
🔹Resistance occurs where an uptrend is expected to pause temporarily, due to a concentration of supply.
🔹Market psychology plays a major role as traders and investors remember the past and react to changing conditions to anticipate future market movement.
🔹Support and resistance areas can be identified on charts using trendlines and moving averages as well as different types of patterns.
