Almost all traders will agree that support and resistance are the two most discussed terms in the technical analysis. Traders will use these terms when they analyze chart patterns.
Traders usually use support and resistance to refer to a certain price level in their charts that act as a barrier. That price level prevents the asset’s price to get any higher. This may sound simple, but as you dig deeper, you will find that these two terms have many variations and concepts.
The Detail Definition
Support defines as the price level where the downtrend will get paused because of a demand concentration. That demand for the shares increases as the price of a particular asset is dropping. Thus, it creates a support line.
On the other hand, resistance defines as the price level where there is a high sell-off due to the increasing prices. Once traders identify a support or resistance zone, then there is a potential entry or exit.
The reason for that is because once a certain asset’s price set a level of support or resistance, it creates two things. One, it can bounce back and get away from that support or resistance level or, two, it can violate the price level and get back to its direction up to the next support or resistance level.
Many trades form based on the assumption that the support or resistance level will not get broken. No matter what happens to the price, whether it stays on the support or resistance level or breakthrough, traders still can bet on the direction. Later on, they will see if they make a correct or wrong bet.
If they make a wrong assumption, they can exit their trade as soon as possible, and get the lowest loss. Contrarily, if it is right, then they gain profit.
The Example
To help you have a better picture of it, read this following example. Imagine there is a trader who hold a stock position size from March to November. This trader expects the stock’s value to increase.
Over several months, the trader notices that the price can’t get above $39, even after it has moved super close to $39. Then, the price level near that $39 is the level of resistance.
On the other hand, resistance prevents the price to go downward.
