Support and resistance levels are points of supply or demand of the stock. The concept of support and resistance is one of the most discussed topics in technical analysis and the stock market because it leads to so many other topics like chart patterns, indicators, Elliott waves, and more.
- Support and resistance lines act as barriers to the stock price.
- They are a fundamental concept of technical analysis.
- There are multiple ways to trade with support and resistance, like buying, selling, and shorting.
- Moving averages and Fibonacci indicators can be used to highlight levels of support and resistance.
What Is Support and Resistance?
Support and resistance levels act as barriers to stock movement which can form chart patterns. So, if a stock is bullish, and there is a resistance point, it may be paused and reverse or temporarily be paused. Conversely, if the stock is bearish, and there is a point of support, it may be paused temporarily or reverse.
Stock movement is constantly trying to be predicted by investors, traders, and software. There are several ways to do this, and support and resistance is one of them. Support and resistance is sometimes called the foundation of technical analysis.
What Is Technical Analysis?
Technical analysis is the method of identifying certain price points and opportunities based on a stock’s chart. It is usually used to solidify or boost a trader’s confidence in their position. So, a trader would introduce chart analysis into their arsenal of trading strategies.
There are many chart patterns that traders use to try and predict future stock movement. Some of these patterns are called the Double Bottom/Top, the Cup and Handle Pattern, the Three Falling Peaks Pattern, and many, many more.
Almost all of the patterns in the stock market can be attributed to lines of support and resistance. Let’s look at an example:
In the picture above, the stock touches the points towards the bottom a few times. It also touches the top a few times. It may be a little hard to see so let’s draw some lines:
The line on the bottom acts as a point of support for the chart (almost like a floor), which stops the stock and bounces it the other way when it touches it. The same thing happens at the top line called a resistance line (almost like a ceiling), which stops the stock at the top.
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Here’s another example:
In this example, there is a support incline line or a trend line on the bottom. Support and resistance lines do not always have to be horizontal. They can be inclined or declined. In this example, the chart touches the bottom support line multiple times, and the top resistance line also, which forms a wedge. This wedge is formed between the lines of support and resistance and in turn forms consolidation as the chart pattern gets smaller and smaller.
How to Trade Support and Resistance Points
There are multiple ways to use support and resistance as an advantage in trading. One is being able to recognize other chart patterns like a Double Pattern and Broadening Pattern with it. Another is to trade using a few simple strategies. Let’s look at a chart:
In this chart, there is a line of support at the bottom and a line of resistance at the top, and price is bouncing between the two. In predicting this trend, a trader may buy at the support line and sell at the resistance line. Or, he/she may buy at the support line and hope for a bullish breakout. Or, the trader may short from the resistance line and buy back at the support line or buy back even further down in a breakout.
Moving Averages and Support and Resistance
A moving average can sometimes act as a line of support or resistance.
This image shows how the blue moving average can sometimes be used as a line of support as price respects it in some areas. It can also sometimes be used as a line of resistance. Moving averages are not only used as lines of support and resistance, but can also be used to predict reversals, trends, and other movements. Still, it can sometimes be used as support and resistance levels.
There is sometimes a tendency for stock price to temporarily stop at whole numbers like 100 and 1,000. This is because of multiple reasons like buyers and sellers setting trading prices at these round numbers, or unsophisticated traders trading at whole numbers rather than those more ambiguous.
Fibonacci levels are often referred to as levels of support and resistance. Technical indicators like the Fibonacci Retracement, Fibonacci Resistance Arc, and the Fibonacci Wedge may point out potential support and resistance levels for the price.
Traders looking at points of support and resistance often analyze the potential for a breakout. A bullish breakout is when the chart passes a point of resistance and a bearish breakout is when the price passes a point of support.
Traders may look for a way to confirm when a breakout is occurring. Trader assessment for confirmation varies, but usually, they look for a candle to close past a line of support or resistance or for the full body to pass a level of support or resistance. Confirmation depends on how comfortable the trader is.
Where To View Charts:
Most charting platforms have some type of candlestick feature, but here are some popular charting platforms:
TradingView is one of the most popular online, free, and compact charting platforms. To view a stock with a candlestick chart, enter the stock’s name or ticker in the search bar and press enter. Then, press the button in the top left, next to the “Indicators” button that looks like this:
Then, press on “Candles”. Some may prefer to use the Heikin Ashi candles discussed above, as they may seem simpler.
Another popular online charting software, powered by Yahoo. To access the candlestick chart, search up a ticker in the top search bar of the homepage, double click on the area chart, press the button that looks like this:
And choose “Candle”.
Stock Charts may be a bit confusing for beginners, but it is very compact with features. To access a candlestick chart, search up a ticker in the search bar, and wallah, a candlestick chart has appeared. You can change the settings as you wish.