Support and resistance

What they are

Support is a price level where falling prices have repeatedly stopped and turned up. Resistance is a level where rising prices have repeatedly stalled and turned down. On a chart, you find them by looking for several turning points at roughly the same price.

Why price respects them

Support and resistance form because traders remember prices and act on them.

• Orders cluster. Traders who missed buying at a low often leave orders there in case price returns. Traders who bought at a high and watched it fall often sell when price gets back to their entry.
• Everyone sees the same chart. A level that has turned price twice is noticed by more people the third time, and their orders make it matter more.
• Round numbers. Prices like 1.00 or 100,000 attract orders simply because people choose them.

Zones, not lines

Different traders place orders at slightly different prices, and wicks often poke through a level before price turns. Treat support and resistance as a zone a little above and below the line. A single wick through the zone is not a break; a close beyond it is.

More touches: more attention, fewer orders

Each time price returns to a level, more traders notice it. But each touch also uses up some of the orders waiting there. A level tested many times in a short period can eventually give way, which is how patterns like the ascending triangle resolve.

Role reversal

Once broken, levels often swap roles. Broken resistance tends to become support, and broken support tends to become resistance. After a breakout, traders who missed it wait for a pullback to the old level to buy, while the sellers who were active there are gone. That pullback is called a retest, and the chart above shows one.

Common mistakes

• Drawing too many levels. If every small wiggle is a level, none of them mean anything. Look for clear, repeated turning points.
• Treating levels as guarantees. Support is where buying stopped declines before. It says nothing certain about next time.
• Reacting to wicks. Wait for a close beyond the zone. The breakouts and fakeouts lesson shows why.