Support and resistance are fundamental concepts in technical analysis. These price levels help traders identify where to buy, sell, and place stops. Here is how to use them.
What is Support?
Support is a price level where buying pressure tends to overcome selling pressure. When price falls to support, it often bounces back up. Think of it as a floor that holds price up.
What is Resistance?
Resistance is a price level where selling pressure tends to overcome buying pressure. When price rises to resistance, it often reverses down. Think of it as a ceiling that caps price.
Key principle: Support and resistance are zones, not exact prices. Price rarely stops at exactly the same level twice.
How to Identify Support and Resistance
1. Previous Highs and Lows
The most basic method. Previous swing highs often become resistance. Previous swing lows often become support.
2. Round Numbers
Psychological levels like $50, $100, $150 often act as support or resistance because traders place orders there.
3. Moving Averages
Key moving averages (20, 50, 100, 200) often act as dynamic support and resistance.
4. Volume Profile
Price levels with high historical volume often act as support/resistance.
5. Trendlines
Diagonal lines connecting highs (resistance) or lows (support) in a trend.
Role Reversal
When support breaks, it often becomes resistance. When resistance breaks, it often becomes support. This is called polarity or role reversal.
Role Reversal Example
Stock has resistance at $50. It breaks above $50 and rallies to $55.
Price then pulls back. The old resistance at $50 now acts as support.
Price bounces off $50 and continues higher.
Trading Support and Resistance
Bounce Trades
- Buy near support when price bounces up
- Sell/short near resistance when price reverses down
- Stop loss just beyond the level
- Look for confirmation (candlestick pattern, volume)
Breakout Trades
- Buy when price breaks above resistance
- Sell/short when price breaks below support
- Wait for confirmation (close beyond level, volume surge)
- Watch for false breakouts
Strength of Levels
Not all support/resistance levels are equal. Stronger levels:
- More touches: Levels tested multiple times are stronger
- Higher timeframe: Daily levels are stronger than 5-minute levels
- Higher volume: Levels with significant volume are stronger
- Clean bounces: Levels with sharp reversals are stronger
Common Mistakes
- Drawing too many levels - focus on the most significant
- Expecting exact touches - levels are zones
- Ignoring the trend - support works better in uptrends, resistance in downtrends
- Trading against strong momentum at levels
Track Your Level-Based Trades
Pro Trader Dashboard helps you analyze your trades at key support and resistance levels.
Summary
Support and resistance are price levels where buying or selling pressure tends to emerge. Identify them using previous highs/lows, round numbers, moving averages, and trendlines. Trade bounces or breakouts at these levels. Remember that levels are zones, not exact prices, and their strength varies based on touches, timeframe, and volume.
Learn more: reading stock charts and technical analysis.