Support and Resistance
Support and resistance are concepts that go hand-in-hand with technical analysis . Both are terms that are used by technical traders and they refer to the specific price points that have historically prevented trades from pushing the price of an underlying security, such as stock, in a specific direction.
When learning how to read stock charts , traders learn that these support and resistance lines emerge as thresholds to price patterns and these lines are the lines where stock prices stop moving up or down.
Both levels represent moments where supply and demand meet. When dealing with the financial markets, prices are driven by extreme supply and demand. As demand increases, prices will inevitably increase and as supply increases, prices will decrease. When supply and demand appears to be equal in a specific market then prices will move sideways. When learning stock market trading terms you must understand that supply is synonymous with the terms bears, bearish, and selling. You must also learn that the term demand is synonymous with the stock market definitions for bulls, bullish, and buying.
Support levels show the level at which a stock price will typically not fall below. In other words, it is referred to as the level at which most buyers tend to enter the stock. Demand is strong enough to prevent pricing from decreasing further and as a result buyers are more inclined to buy whereas sellers are less inclined to sell. Once the support level is reached it is suggested that the demand will overcome supply which will prevent the price from falling below the support level. Support levels are typically below the current price and sometimes price movements can dip below the support level briefly, particularly in volatile markets.
When discussing support and resistance levels you must also understand what the resistance level is. Resistance is the price that stock or other another financial security can trade at but that cannot exceed for a specific amount of time. In other words, it is referred to as the level at which most buyers are less inclined to buy and sellers are more inclined to sell. Once the resistance level is reached it is suggested that the supply will overcome the demand which will prevent the price from rising above the resistance level. Resistance levels are typically above the current price and sometimes price movements can rise above the resistance levels briefly, particularly in volatile markets.
In addition to support and resistance levels, please also read about Japanese Candlesticks which is a trading strategy used by some of the world’s most successful traders along with other forms of technical analysis. It is the fastest way for new investors to quickly and accurately read stock charts. Once you are comfortable with the major candlestick signals, expand your expertise by learning the secondary Candlestick Patterns . Combine these with your favorite technical indicators , such as the moving average , and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or exchange traded funds .