TECHNICAL ANALYSIS TECHNICAL ANALYSIS BASIC EDUCATION

Support and Resistance Basics

BY CASEY MURPHY | Updated May 19, 2019

TABLE OF CONTENTS
Defining Support, Resistance
The Basics
Trend Lines
Round Numbers
Moving Averages
Other Indicators
Significance of Zones
The Bottom Line

CLOSE -

The concepts of support and resistance are undoubtedly two of the most highly discussed
attributes of technical analysis. Part of analyzing chart patterns, these terms are used by
traders to refer to price levels on charts that tend to act as barriers, preventing the price of an
asset from getting pushed in a certain direction. At first, the explanation and idea behind
identifying these levels seem easy, but as you'll find out, support and resistance can come in
various forms, and the concept is more difficult to master than it first appears.

D O YO U WA NT TO BECOME A BETTER I NV ESTO R ?

GET AHEAD OF
THE GAME

NO THANKS
 KEY TAKEAWAYS
Technical analysts use support and resistance levels to identify price points on a
chart where the probabilities favor a pause, or reversal, of a prevailing trend. 
Support occurs where a downtrend is expected to pause, due to a concentration of
demand.
Resistance occurs where an uptrend is expected to pause temporarily, due to a
concentration of supply. 
Market psychology plays a major role as traders and investors remember the past
and react to changing conditions to anticipate future market movement.

Defining Support, Resistance

Support is a price level where a downtrend can be expected to pause due to a concentration
of demand. As the price of a security drops, demand for the shares increases, thus forming
the support line. Meanwhile, resistance zones arise due to a sell-off when prices increase.

Advertisement

D O YO U WA NT TO BECOME A BETTER I NV ESTO R ?

GET AHEAD OF
THE GAME

NO THANKS
 Advertisement

Once an area or "zone" of support or resistance has been identified, it provides valuable
potential trade entry or exit points. This is because, as a price reaches a point of support or
resistance, it will do one of two things – bounce back away from the support or resistance
level, or violate the price level and continue in its direction – until it hits the next support or
resistance level.

Most forms of trades are based on the belief that support and resistance zones will not be
broken. Whether the price is halted by the support or resistance level, or it breaks through,
traders can "bet" on the direction and can quickly determine if they are correct. If the price
moves in the wrong direction, the position can be closed at a small loss. If the price moves in
the right direction, however, the move may be substantial.

Advertisement

Advertisement

D O YO U WA NT TO BECOME A BETTER I NV ESTO R ?

GET AHEAD OF
THE GAME

NO THANKS
1:48
Trading With Support And Resistance

The Basics
Most experienced traders will be able to tell many stories about how certain price levels tend
to prevent traders from pushing the price of an underlying asset in a certain direction. For
example, assume that Jim was holding a position in a stock between March and November
and that he was expecting the value of the shares to increase.

Let's imagine that Jim notices that the price fails to get above $39 several times over several
months, even though it has gotten very close to moving above that level. In this case, traders
would call the price level near $39 a level of resistance. As you can see from the chart below,
resistance levels are also regarded as a ceiling because these price levels prevent the market
from moving prices upward.

D O YO U WA NT TO BECOME A BETTER I NV ESTO R ?

Figure 1 GET AHEAD OF

THE GAME

NO THANKS
On the other side of the coin, we have price levels that are known as support. This
terminology refers to prices on a chart that tend to act as a floor by preventing the price of an
asset from being pushed downward. As you can see from the chart below, the ability to
identify a level of support can also coincide with a good buying opportunity, because this is
generally the area where market participants see good value and start to push prices higher
again.

Figure 2

Trend Lines
The examples above show a constant level prevents an asset's price from moving higher or
lower. This static barrier is one of the most popular forms of support/resistance, but the price
of financial assets generally trends upward or downward, so it is not uncommon to see these
price barriers change over time.
D O YO UThis is TO
WA NT why understanding the
BECOME A BETTER I NV concepts
ESTO R? of trending and
trendlines is important when learning about support and resistance.
GET AHEAD OF
THE GAME
When the market is trending to the upside, resistance levels are formed as the price action
NO THANKS
slows and starts to pull back toward the trendline. This occurs as a result of profit taking or
near-term uncertainty for a particular issue or sector. The resulting price action undergoes a
"plateau" effect, or a slight drop-off in stock price, creating a short-term top.

Advertisement

Advertisement

Many traders will pay close attention to the price of a security as it falls toward the broader
support of the trendline because historically this has been an area that has prevented the
price of the asset from moving substantially lower. For example, as you can see from the
Newmont Mining Corp (NEM) chart below, a trendline can provide support for an asset for
several years. In this case, notice how the trendline propped up the price of Newmont's
shares for an extended period of time.

D O YO U WA NT TO BECOME A BETTER I NV ESTO R ?

GET AHEAD OF
THE GAME

NO THANKS
Figure 3

On the other hand, when the market is trending to the downside, traders will watch for a
series of declining peaks and will attempt to connect these peaks together with a trendline.
When the price approaches the trendline, most traders will watch for the asset to encounter
selling pressure and may consider entering a short position because this is an area that has
pushed the price downward in the past.

The support/resistance of an identified level, whether discovered with a trendline or through

any other method, is deemed to be stronger the more times that the price has historically
been unable to move beyond it. Many technical traders will use their identified support and
resistance levels to choose strategic entry/exit points because these areas often represent
the prices that are the most influential to an asset's direction. Most traders are confident at
D O YO U WA NT TO BECOME A BETTER I NV ESTO R ?
these levels in the underlying value of the asset, so the volume generally increases more
than usual, making it much more difficultGET forAHEAD
traders
OF to continue driving the price higher or
lower. THE GAME

NO THANKS
Advertisement
 Advertisement

Important: Unlike the rational economic actors portrayed by financial models,

real human traders and investors are emotional, make cognitive errors, and fall
back on heuristics or shortcuts. If people were rational, support and resistance
levels wouldn't work in practice!

Round Numbers
Another common characteristic of support/resistance is that an asset's price may have a
difficult time moving beyond a round price level such as $50. Most inexperienced traders
tend to buy or sell assets when the price is at a whole number because they are more likely
to feel that a stock is fairly valued at such levels. Most target prices or stop orders set by
either retail investors or large investment banks are placed at round price levels rather than
at prices such as $50.06. Because so many orders are placed at the same level, these round
numbers tend to act as strong price barriers. If all the clients of an investment bank put in
sell orders at a suggested target of, for example, $55, it would take an extreme number of
purchases to absorb these sales and, therefore, a level of resistance would be created.

Moving Averages
Most technical traders incorporate the power of various technical indicators, such as moving
averages, to aid in predicting future short-term momentum, but these traders never fully
realize the ability these tools have for identifying levels of support and resistance. As you can
see from the chart below, a moving average is a constantly changing line that smooths out
past price data while also allowing the trader to identify support and resistance. Notice how
the price of the asset finds support at the moving average when the trend is up, and how it
acts as resistance when theD trend is down.
O YO U WA NT TO BECOME A BETTER I NV ESTO R ?

GET AHEAD OF
THE GAME

NO THANKS
Figure 4

Traders can use moving averages in a variety of ways, such as to anticipate moves to the
upside, when price lines cross above a key moving average, or to exit trades, when the price
drops below a moving average. Regardless of how the moving average is used, it often
creates "automatic" support and resistance levels. Most traders will experiment with
different time periods in their moving averages so that they can find the one that works best
for this specific task.

Other Indicators
In technical analysis, many indicators have been developed to identify barriers to future
price action. These indicators seem complicated at first, and it often takes practice and
experience to use them effectively. Regardless of an indicator's complexity, however, the
interpretation of the identified barrier should be consistent to those achieved through
simpler methods. D O YO U WA NT TO BECOME A BETTER I NV ESTO R ?

GET AHEAD OF

1.62
THE GAME

NO THANKS
 The 'golden ratio' used in the Fibonacci sequence, and also
observed repeatedly in nature and social structure.

For example, the Fibonacci retracement tool is a favorite among many short-term traders
because it clearly identifies levels of potential support/resistance. The reasoning behind how
this indicator calculates the various levels of support and resistance is beyond the scope of
this article, but notice in Figure 5 how the identified levels (dotted lines) are barriers to the
short-term direction of the price.

Figure 5

Measuring the Significance

D O YO U WA NTof
TOZones
BECOME A BETTER I NV ESTO R ?
Remember how we used the terms "floor" for support and "ceiling" for resistance?
Continuing the house analogy, a securityGET AHEAD
is how OF
a rubber ball that bounces in a room will hit
THE GAME
the floor (support) and then rebound off the ceiling (resistance). A ball that continues to
bounce between the floor and the ceiling isNOsimilar
THANKS to a trading instrument that is
experiencing price consolidation between support and resistance zones. Now imagine that
the ball, in mid-flight, changes to a bowling ball. This extra force, if applied on the way up,
will push the ball through the resistance level; on the way down, it will push the ball through
the support level. Either way, extra force, or enthusiasm from either the bulls or bears, is
needed to break through the support or resistance.

Often, a support level will eventually become a resistance level when the price attempts to
move back up, and conversely, a resistance level will become a support level as the price
temporarily falls back. Price charts allow traders and investors to visually identify areas of
support and resistance, and they give clues regarding the significance of these price levels.
More specifically, they look at:

Number of Touches. The more times the price tests a support or resistance area, the more
significant the level becomes. When prices keep bouncing off a support or resistance level,
more buyers and sellers notice and will base trading decisions on these levels.

Preceding Price Move. Support and resistance zones are likely to be more significant when
they are preceded by steep advances or declines. For example, a fast, steep advance or
uptrend will be met with more competition and enthusiasm and may be halted by a more
significant resistance level than a slow, steady advance. A slow advance may not attract as
much attention. This is a good example of how market psychology drives technical
indicators.

Volume at Certain Price Levels. The more buying and selling that has occurred at a particular
price level, the stronger the support or resistance level is likely to be. This is because traders
and investors remember these price levels and are apt to use them again. When strong
activity occurs under high volume and the price drops, a lot of selling will likely occur when
price returns to that level, since people are far more comfortable closing out a trade at the
breakeven point rather than at a loss.

Time. Support and resistance zones become more significant if the levels have been tested
regularly over an extended period of time.

The Bottom Line

Support and resistance levels are one of the key concepts used by technical analysts and
D O YO U WA NT TO BECOME A BETTER I NV ESTO R ?
form the basis of a wide variety of technical analysis tools. The basics of support and
resistance consist of a support level, which GETcan be thought
AHEAD OF of as the floor under trading
THE GAME
prices, and a resistance level, which can be thought of as the ceiling. Prices fall and test the
support level, which will either "hold," and NO the price will bounce back up, or the support
THANKS
level will be violated, and the price will drop through the support and likely continue
lower to the next support level.

Determining future levels of support can drastically improve the returns of a short-term
investing strategy because it gives traders an accurate picture of what price levels should
prop up the price of a given security in the event of a correction. Conversely, foreseeing a
level of resistance can be advantageous because this is a price level that could potentially
harm a long position, signifying an area where investors have a high willingness to sell the
security. As mentioned above, there are several different methods to choose when looking to
identify support/resistance, but regardless of the method, the interpretation remains the
same – it prevents the price of an underlying asset from moving in a certain direction.

Compete Risk Free with $100,000 in Virtual Cash

Put your trading skills to the test with our FREE Stock Simulator. Compete with thousands of
Investopedia traders and trade your way to the top! Submit trades in a virtual environment
before you start risking your own money. Practice trading strategies so that when you're
ready to enter the real market, you've had the practice you need. Try our Stock Simulator
today >>

Compare Popular Online Brokers

Advertiser Disclosure
D O YO U WA NT TO BECOME A BETTER I NV ESTO R ?

Related Articles GET AHEAD OF

THE GAME
TECHNICAL ANALYSIS BASIC EDUCATION
Support andNOResistance
THANKS Reversals
 TRADING PSYCHOLOGY
The Psychology of Support and Resistance Zones

ADVANCED TECHNICAL ANALYSIS CONCEPTS

Gauging Support and Resistance With Price by Volume

TECHNICAL ANALYSIS BASIC EDUCATION

Trade Broken Trendlines Without Going Broke

TECHNICAL ANALYSIS BASIC EDUCATION

Simple Moving Averages Make Trends Stand Out

FOREX TRADING STRATEGY & EDUCATION

Pivot strategies: A handy tool for forex traders

Related Terms
Tirone Levels
Tirone levels are a series of three sequentially higher horizontal lines used to identify possible areas of
support and resistance for theD price
O YO Uof
WAan
NTasset.
TO BECOME
more A BETTER I NV ESTO R ?

Support (Support Level) Definition

GET AHEAD OF
THE GAME
Support refers to a level that the price action of an asset has difficulty falling below over a specific
period of time. more NO THANKS
Reading Into Price Levels
A price level is the average of current prices across the entire spectrum of goods and services
produced in the economy. more

Breakdown
A breakdown is a price movement through an identified level of support, which is usually followed by
heavy volume and sharp declines. more

Breakout Definition and Example

A breakout is the movement of the price of an asset through an identified level of support or
resistance. Breakouts are used by some traders to signal a buying or selling opportunity. more

Resistance (Resistance Level)

Resistance is the uppermost price level of an asset over a period of time. more

About Us Contact Terms of Use

Advertise Privacy Policy Careers

Investopedia is part of the Dotdash publishing family.

The Balance | Lifewire | TripSavvy | The Spruce and more

D O YO U WA NT TO BECOME A BETTER I NV ESTO R ?

GET AHEAD OF
THE GAME

NO THANKS