A breakout trader might jump in on the long side if the resistance area is breached. A trader who is long might want to place a take-profit order to sell near to the resistance zone. Resistance is often visualized on a stock chart as a horizontal line connecting multiple price peaks where the stock has previously struggled to break through. For example, if a stock repeatedly rises to $50 but fails to climb higher before dropping back down, $50 becomes a resistance level. This phenomenon isn’t random; it’s a reflection of market psychology and historical trading behavior. Support and resistance levels can often be relatively close.
One tool technical traders use to measure and time their entries is a trendline, such as the one shown What Is Ethereum in Figure 2 (blue line). They were thinking about buying the stock at $50 but never “pulled the trigger.” Now the stock is at $55 and they regret not buying it. They decide that if it gets to $50 again, they will not make the same mistake and they will buy the stock this time. Let’s use a few examples of market participants to explain the psychology behind support and resistance. The examples above show how an asset’s price stops moving at a specific level.
- Support refers to a price level at which an asset is unlikely to fall further, while resistance refers to a price level at which an asset is unlikely to rise further.
- Support and resistance are two foundational concepts in technical analysis.
- Another example is where option holders may want to defend their option positions by selling a lot of shares at a specific price point ahead of resistance.
- Likewise, a downtrending asset may be considered reversing to the upside if it begins trading above the 50-day MA.
- Stop-loss buy orders above the resistance area may also come in to play, bringing in yet another source of buying and clearly breaking above the resistance.
- After breaking resistance, sellers often test lower to see if the point holds.
If you’ve traded before, you’ve probably been through all of these scenarios and experienced the emotions and psychology behind them. First let’s assume there are buyers who’ve been buying a stock close to a support area. They buy some stock at $50 and now it moves up and away from that level to $55. The buyers are happy and want to buy more stock at $50, but not $55. They decide if the price moves back down to $50, they will buy more. Below is an example of a daily NVDA chart with Bollinger Bands overlaid.
How can you use support and resistance levels to manage risk?
Known as the Polarity Principle, once resistance is broken, it becomes support, and vice versa. Whether it becomes major or minor support depends on the resistance’s time frame. A break above a recent daily high is more bullish than a break of an hourly resistance point. Supply can come from multiple sources, such as take-profit selling around a resistance point or zone. Another example is where option holders may want to defend their option positions by selling a lot of shares at a specific price point ahead of resistance. And of course, macro news may pull traders in to short the market for a specific stock or other asset if negative news emerges, leaving a resistance point behind in its wake.
Price floors and ceilings: Areas of support and resistance in the markets
- To identify support or resistance, you have to look back at the chart to find a significant pause in a price decline or rise.
- Resistance can also be a zone, spanning several points like $0.50 to $1.00.
- It is a point where the selling pressure surpasses the buying pressure, leading to a pause or reversal in an upward price movement.
- Traders also find support and resistance in smaller time frames like one-minute and five-minute charts.
- For example, imagine a stock trading at $98, with resistance at $100.
Traders would call the price level near $39 a level of resistance. Support and resistance are two foundational concepts in technical analysis. Understanding what they are and how they work is essential to correctly reading a price chart. Notice the main trendline (in solid blue) and the smaller trendline (in dotted blue). The arrows show levels where buying activity overpowered selling activity during a pullback, causing prices to move higher.
Preceding Price Move
This is because traders and investors remember these price levels and are apt to use them again. In the above chart, the red dotted horizontal line indicates the resistance level. It shows that at that price level, the selling pressure generated by the bears in the market has been strong enough to resist the buying pressure, resulting in a drop in price. Once a breakout above this horizontal line materializes, individuals can enter a long position to benefit from the rally. If individuals want to see more charts to get a clear idea of this concept, they can visit the TradingView website. Resistance in stocks is more than a line on a chart—it’s a window into market psychology, supply-demand dynamics, and trading opportunities.
What’s so important about support and resistance?
Resistance isn’t just about numbers; it’s about human behavior. Selling at resistance might stem from fear of a reversal, while buying a breakout reflects greed for bigger gains. Emotional discipline is key—sticking to a plan rather than reacting impulsively can mean the difference between profit and loss. For example, a fast, steep advance or uptrend will be met with more competition and enthusiasm and may be halted by a more significant resistance level than a slow, steady advance. This is a good example of how market psychology drives technical indicators.
These levels are significant in trading because they represent price zones where traders perceive an asset as overvalued. These levels act as psychological and technical barriers that can limit further upward price movement. Traders pay attention to these levels as they indicate potential selling pressure and market hesitation. Support and resistance levels are key concepts that form the basis of a wide variety of technical analysis tools relied on by many traders. Support levels can be thought of as the floor under the price, and resistance levels can be thought of as the ceiling above the price. Traders and analysts chart the movements of stock prices over time to pinpoint the support levels and resistance levels that indicate optimal times to buy and sell.
How Do I Trade with Resistance Levels?
It depends on your position and view of the market, as resistance will eventually be broken at some point. An aggressive trader might go short from just below the resistance level, looking for a pullback or reversal lower, essentially speculating that the resistance will hold. That same trader would also likely place a buy-stop order above the resistance zone in case it breaks.
Should the uptrend continue and eventually break above the resistance level, those stop-loss buy orders may get triggered, generating a new source of demand that pushes the price higher. Alert breakout traders may enter the market on the buy side, adding another source of buying demand. The more buying and selling that has occurred at a particular price level, the stronger the support or resistance level is likely to be.
The green arrows show where the stock price bounced off the 50-day MA and continued to trend higher. On the left side of the chart, the 50-day MA seems to act as a resistance point. The red arrows show where the price rallied to the 50-day MA, then backed off. But when the stock did break through to the upside, it indicated the trend had changed. For example, as you can see from the Newmont Corp. (NEM) chart below, a trendline can provide support for an asset for several years.
Strategies for Trading with Resistance Levels
Also, many target prices and stop orders set by retail investors and large investment banks are placed at round price levels. Because so many orders are placed at the same level, these round numbers tend to act as strong price barriers. For example, assume Jim is holding a position in a stock from March to November and that he expects the value of the shares to increase. Jim notices that the price fails to get above $39 several times over several months.
Chart of the week
However, each time the price approached $100, it encountered selling pressure, resulting in the price reversing and moving lower. This consistent selling activity near the $100 level indicates a specific level where the selling pressure exceeds the buying pressure. Investors perceive the stock as overvalued or facing selling pressure at that price. Every price reversal at support tells us that there was more buying than selling—enough to cause prices to rise.