Support and resistance are horizontal lines or zones on a price chart that indicate where the price has historically had difficulty moving beyond.
- Support :
- Support is a price level where buying interest is strong enough to prevent the price from falling further. It acts as a “floor” that supports the price.
- Resistance :
- Resistance is a price level where selling interest is strong enough to prevent the price from rising further. It acts as a “ceiling” that caps the price movement.
These levels are not fixed but are zones where supply and demand dynamics shift, causing the price to pause, reverse, or consolidate.
How to Identify Support & Resistance:
- Historical Price Action:
- Look for previous lows and highs where the price reversed or consolidated.
- Multiple Touch Points:
- Strong support or resistance levels are often tested multiple times without being broken.
- Round Numbers:
- Many traders place orders at psychologically significant levels like 1.2000 or 1.2500.
- Moving Averages and Indicators:
- Dynamic support and resistance can be identified using moving averages, trend lines, or Bollinger Bands.
Types of Support & Resistance:
- Static Levels:
- Horizontal lines drawn at specific price points based on past price action.
- Dynamic Levels:
- Moving support and resistance that change over time, such as moving averages or trend lines.
Using Support & Resistance in Your Trading Strategy:
- Entry Points:
- Buy near support levels when the price shows signs of reversal; sell near resistance.
- Stop-Loss Placement:
- Place stop-loss orders just below support when buying or just above resistance when selling to limit losses.
- Profit Targets:
- Set profit targets near the next support/resistance zone to maximize gains.
- Breakouts and Fakeouts:
- Be alert for breakouts—when the price moves beyond support or resistance—indicating potential trend changes. Confirm breakouts with volume or other indicators to avoid false signals.