What is Support?
Support is a price level where a downtrend can be expected to pause due to a concentration of demand or buying interest. As the price of a security drops, demand for the shares increases, thus forming the support line. It can be visualized as a floor that is supporting the price.
What is Resistance?
Resistance is a price level where an uptrend can be expected to pause temporarily, due to a concentration of supply or selling interest. As the price of a security rises, selling pressure increases, thus forming the resistance line. It can be visualized as a ceiling that is preventing the price from moving higher.
Identifying Support and Resistance
Support and resistance levels are identified by looking for historical price points where the market has reversed. To draw a support or resistance level, you need to find at least two points where the price has bounced. The more times the price has tested a level without breaking it, the stronger that level is considered to be.
The Role Reversal Principle
A key principle of support and resistance is that once a level is broken, its role can reverse. If a support level is broken, it can become a new resistance level. Conversely, if a resistance level is broken, it can become a new support level. This phenomenon occurs because market psychology shifts after a significant breakout.
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