The Psychology of Support and Resistance Zones

Traders and analysts utilise them to gauge market sentiment and make strategic trading decisions. Support levels indicate potential buying opportunities, signaling price floors where the asset is likely to find demand. Conversely, resistance levels pinpoint potential selling points, representing price ceilings where selling pressure may intensify. These levels provide a critical framework for interpreting price charts and determining when to enter or exit trades, contributing to more informed decision-making. A breakout is a stock price moving outside a defined support or resistance level with increased volume. A breakout trader enters a long position after the stock price breaks above resistance or enters a short position after the stock breaks below support.

1. The support and resistance levels enable you to place entry price targets, giving you adequate risk and reward scenarios.
2. For example, assume that Jim was holding a position in stock from March to November and that he was expecting the value of the shares to increase.
3. Within every significant price move up or down there will be times when plateaus are reached and the stock price drifts sideways.

Oftentimes this breakout occurs due to fundamental changes in the company’s performance, such as a new product launch or news about market share gains and improved cash on hand. Step 2 — Look for areas where a pierce reversal happened, and mark those swing highs and lows. Support can be established with the previous reaction lows, while resistance can be established by using the previous reaction highs.

What Are Support and Resistance Zones?

A long entry on AAPL at $176.13 can be taken with a trailing stop under the preceding low of $171.96 support. Fibonacci retracement levels are also static support and resistance levels. These levels are created by plotting a swing high to a swing low and back to the swing high. However, the subjective part is determined by where you start and end your plots.

Traders use support and resistance levels to plan entry and exit points for trades. If the price action on a chart breaches the support levels, it is seen as an opportunity to buy in or take a short position, depending on what the trader sees from other indicators. If the breach occurs on an uptrend, it may even be a sign of a reversal.

Resistance definition

After identifying support and resistance levels, traders should be able to answer all of the above points and enter a profitable trade. In Nov/Dec-99, Lucent Technologies (LU) formed a trading range that resembled a head and shoulders pattern (red oval). When the stock broke support at 60, there was little or no time to exit.

What Is the Zone of Resistance?

Resistance levels can be identified through historical price data, chart patterns, and market sentiment. This serves as critical reference points for traders to make informed decisions regarding entry, exit, and risk management strategies. Resistance is the level at which supply is strong enough to stop the bitfinex review stock from moving higher. In the image above you can see that each time the price reaches the resistance level, it has a hard time moving higher. The rationale is that as the price rises and approaches resistance, sellers (supply) become more inclined to sell and buyers (demand) become less willing to buy.

A support level can be thought of as the floor and a resistance level a ceiling for prices in a market. These levels are formed, in part, due to market psychology that establishes bullish sentiment at the support and bearish at the resistance. Looking at the above chart, you can see the initial consolidation of prices, the breakout, the retest, and the price objective reached. Setting the stop below this level allows prices to retest and catch the trade quickly if it fails.

For example, if a stock spikes hard to a resistance level, it may be rejected. However, if a stock slowly grinds to a price level, it can break through the resistance and turn it into a support level. Adding a relative strength indicator (RSI) oscillator utilizing the 30/70 oversold and overbought conditions can help to fine-tune your trades at the support and resistance levels. The accumulation and distribution indicator can also determine the money flow strength and when it’s waning or strengthening. While moving averages are dynamic support and resistance levels, horizontal and diagonal trendlines are static support and resistance lines.

Support and resistance are similar phenomena, with one capping price growth through selling and the other stopping price drops through bargain-seeking buying. Of course, both are not permanent phenomena, and stock prices ultimately can move past support and resistance levels. From a trading perspective, resistance levels offer various trading opportunities. You alpari broker review may go with the flow and buy into a resistance zone, looking for a break higher. Or, you could look to sell into the resistance zone, going short, holding the view that the resistance will hold and prices will turn lower. No matter your situation, once prices near a resistance zone, it’s time to take notice of the price action and subsequent opportunities.

If the stock has made an average price swing of four points over the past few price swings, this would be a reasonable objective. © ۲۰۲۴ Market data provided is at least 10-minutes delayed and hosted by Barchart thinkmarkets review Solutions. Information is provided ‘as-is’ and solely for informational purposes, not for trading purposes or advice, and is delayed. To see all exchange delays and terms of use please see Barchart’s disclaimer.