Using Support and Resistance

Support and resistance are key concepts in trading that refer to price levels at which a security is likely to encounter difficulty moving beyond. Support refers to a price level at which demand is thought to be strong enough to prevent the price from declining further. This is because buyers tend to enter the market as the price drops, attracted by the potential for a bargain. In contrast, resistance refers to a price level at which supply is thought to be strong enough to prevent the price from rising further. This is because as the price increases, sellers tend to enter the market, taking profits and adding supply to the market.

Support and resistance levels can be identified by analyzing past price movements and identifying price levels at which the security has had difficulty breaking through. These levels can then be used as a guide for making trades, with traders looking to buy at support and sell at resistance. However, it is important to note that support and resistance levels are not exact and can be broken through, particularly in the case of a major news event or market shift.

Traders often use a combination of technical analysis techniques, such as trend lines and chart patterns, to identify potential support and resistance levels. It is also common for traders to use a variety of indicators, such as moving averages, to confirm the presence of support or resistance. Overall, understanding and utilizing support and resistance can be a valuable tool for traders as they look to enter and exit positions in the market.