Support and Resistance
By Samantha Baltodano
What is Support and Resistance?
Support and resistance levels are important concepts in trading that can help you understand the potential price movements of a security.
Support levels are like a floor for the price of a security. They are levels where the price has previously found support, meaning that many buyers were willing to buy the security at that price, causing the price to go up.
When the price approaches a support level, traders expect it to bounce back up because there is buying pressure. If the support level is broken, the price might continue to fall.
Resistance levels, on the other hand, are like a ceiling for the price of a security. They are levels where the price has previously found resistance, meaning that many sellers were willing to sell the security at that price, causing the price to go down.
When the price approaches a resistance level, traders expect it to fall back down because there is selling pressure. If the resistance level is broken, the price might continue to rise.
Example
For example, let's say you are watching the price of a stock that has been trading between $20 and $30 for a few months.
The $20 level acts as support because every time the price approaches it, buyers step in and buy the stock, causing the price to go up.
The $30 level acts as resistance because every time the price approaches it, sellers step in and sell the stock, causing the price to go down.
If the price of the stock breaks through the $30 resistance level and goes up to $35, this is a breakout, and the price might continue to rise because there is now buying pressure.
Summary
Support and resistance levels are important concepts in trading that can help you understand potential price movements of a security. Support levels act as a floor, and resistance levels act as a ceiling for the price of a security. By identifying these levels, traders can make more informed trading decisions and manage their risk.
Like what you read? Check out the rest of our content!
