Support and resistance are the most commonly used tool when undergoing technical analysis. Support levels and resistance levels 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.
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.
Conversely resistance is a price level where an uptrend can be expected to pause due to a concentration of sellers, this could be due to traders taking profit or price value speculations. Hence a resistance price is formed as there are more sellers than buyers.
How to use support and resistance lines
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.