Support and resistance

Support and resistance are key concepts in technical analysis (TA) that help analysts, traders or investors to identify levels on a price chart where the price is likely to encounter barriers to its movement.

Support:

Support refers to a price level at which buying pressure is expected to be strong enough to prevent the price from falling further. It is seen as a floor beneath the price where demand for the asset is anticipated to exceed supply that causing the price to reverse or 'bounce' upwards.

Support levels are often identified as previous lows or areas where the price has historically found buying interest.

Resistance:

Resistance is just the opposite of support. It refers to a price level at which selling pressure is expected to be strong enough to prevent the price from rising further. It is seen as a ceiling above the price where supply of the asset is expected to exceed demand that causing the price to reverse or 'pull-back' downwards.

Resistance levels are often identified as previous highs or areas where the price has historically encountered selling pressure.

Support and resistance levels can be identified by using various methods and tools like:

• Horizontal lines: Analysts can draw horizontal lines on a price chart to point out key levels of support and resistance based on previous price reactions. These levels can act as reference points for future price movements.
• Trendlines: Trendlines are diagonal lines drawn on a price chart to connect consecutive high prices or low prices. They can act as areas of support (in the case of an upward trendline) or resistance (in the case of a downward trendline) as the price approaches them.
• Moving averages: Moving averages (MA) such as the 20-day, 50-day or 200-day moving average are popular technical indicators used to identify dynamic support and resistance levels. When the price approaches a moving average, it can act as a support or resistance level, depending on the direction of the moving average.
• Pivot points: Pivot points are calculated based on the previous day's price action and can help identify potential support and resistance levels for the current trading day. Traders use pivot points along with other technical indicators to determine potential price reversals or breakouts.

Support and resistance levels are significant because they provide analysts with important reference points for making future trade decisions. Analysts often look for opportunities to enter trades near support levels with the expectation that the price will bounce higher and they may consider selling or taking profits near resistance levels with the anticipation of a price reversal. These levels can also be used to set stop-loss (SL) orders or take-profit (TP) targets to manage risk and optimize trade outcomes.