Support and Resistance

Support and resistance are two of the most popular terms used when trading the financial markets.

1. Defining Support

  • Definition: Support is a price level on a chart that signifies greater demand (more buyers) than supply (fewer sellers).
  • Location: Support is always found below the current market price.
  • Breaching: During a strong downtrend, support levels may be breached, even though a bottom temporarily forms, because overall supply is greater than demand.

2. Defining Resistance

  • Definition: Resistance is a price level on a chart that signifies greater supply (more sellers) than demand (fewer buyers).
  • Location: Resistance is always found above the current market price.
  • Breaching: During a strong uptrend, resistance levels may be breached, even though a top temporarily forms, because overall demand is greater than supply.

Key Rules and Transformations

It is important to remember that support and resistance are relative to the current price.

  1. Any price level above the current price acts as resistance.
  2. Any price level below the current price acts as support.
  3. Role Reversal: When a resistance level is successfully breached (broken through), it often transforms and becomes the new support level.
  4. Role Reversal: Conversely, when a support level is successfully breached, it often transforms and becomes the new resistance level.

Detailed Summary

Support and resistance are fundamental concepts in financial market trading. Support is a price level below the current market price where demand exceeds supply (more buyers), while resistance is a price level above the current price where supply exceeds demand (more sellers). Although these levels temporarily halt price movement, they can be breached during strong trends. Crucially, these levels are relative to the current price, and a successful breach often leads to a role reversal: broken resistance becomes new support, and broken support becomes new resistance.

Key Takeaways

  • Support is defined by greater demand (more buyers) than supply (fewer sellers).
  • Support levels are located below the current market price.
  • Resistance is defined by greater supply (more sellers) than demand (fewer buyers).
  • Resistance levels are located above the current market price.
  • During strong downtrends, support may be breached because overall supply is greater than demand.
  • During strong uptrends, resistance may be breached because overall demand is greater than supply.
  • A breached resistance level often transforms into a new support level (Role Reversal).
  • A breached support level often transforms into a new resistance level (Role Reversal).