Support and resistance levels are the floors and ceilings that price levels find difficult to surpass. They come in various forms and are caused by various technical factors, such as historical price levels, strong round numbers (like 100, etc.), moving averages, candlestick formations, trendlines, and Fibonacci numbers.
To avoid confusion, these levels are not necessarily horizontal as they can be formed by trendlines and moving averages. There can be many of them simultaneously, and just to simplify things, certain price levels can act as both support and resistance. This means that if a security drops below a support level at 100 and then the security drops from 100 to 90, and a few weeks later the trends become bullish again, that level of 100 could now act as resistance.
What are support and resistance?
Financial markets are driven by supply and demand. So, when we see an uptrend within a chart, demand surpasses supply, pushing prices higher, and conversely with a downtrend. Support and resistance are price levels within the market where the dynamics of supply and demand change – that is, supply exceeds demand at the maximum resistance level, preventing prices from increasing, and demand surpasses supply near support, halting the fall in prices.
Support – There is enough demand at a price to prevent prices from decreasing. If demand surpasses supply, prices will rise.
Resistance – There is NOT enough demand at a price to sustain the rise in prices. Once supply surpasses demand, prices fall.
“Zones” of support and resistance
Technical analysis is not an exact science, and every market and circumstance has its own characteristics. Sometimes, exact levels of support and resistance work best, and sometimes, zones work better. Generally, the narrower the range, the more precise the level. These are intended as general guidelines, and each trading interval should be judged on its own merits.
So, why are they important?
They are important because many traders are watching them, and often these are the same levels. Many traders use pending orders to buy or sell, and frequently, these buy and sell orders will be placed at significant support and resistance levels. Therefore, traders make trading decisions based on these levels: buying at support and selling at resistance. Thus, it is understandable that identifying these crucial levels is fundamental to technical analysis, and once broken, the market’s supply and demand relationship could change.
