Support and Resistance

Support

The level at which a financial instrument, during the certain period of time, has had a difficulty to break below is called “support”. It is thought of as the level where a lot of investors intend to buy an instrument, also known as the “support” level.

If the financial instrument’s price approaches support level, this is a test for the instrument. Support could be either confirmed or taken out. If the support is confirmed, it means that a number of buyers entered the market and pushed the price higher.

In cases where buyers do not enter the market, support level will be taken out (cleared) and the financial instrument’s price will drop below the “support” level.


Resistance



The level where market trades but does not exceed for a certain period of time is called resistance. It is thought of as the level where an investor intends to sell a financial instrument.
The resistance level is confirmed if the financial instrument’s price approaches but does not break higher, due to big sales at that level.

In cases where the price goes through “resistance” level and rises higher, it is considered that resistance is taken out (cleared).

As the financial instrument price breaks through the resistance level and moves to a higher ground, the level of resistance becomes the level of support. A new level of resistance will then be formed at some point in the future. On the other side, as the price range falls below the support level, that level then becomes the new resistance mark.

Understanding the concepts of trending and trendlines is important to know about support and resistance. During a market trending to the upside, resistance levels are formed as the price action slows for an extended period of time. Pauses in the market often result from profit taking or near-term uncertainty for a particular issue or sector. The resulting price action undergoes a slight drop-off in the instrument price, creating an area of resistance. As a market falls off into a downtrend, the opposite occurs, creating levels of support.

Volume and time are important factors in the development of both support and resistance. The strongest areas of support and resistance are those that have developed over an extended period of time, in which great number of contracts is traded. For example, if a financial instrument has traded, say, at the US$10 level for five trading days, that price level is not nearly as substantial as the one that has traded in the same range for a number of weeks.

Volume, or the number of contracts traded, also plays an important role in support and resistance levels. Heavier volume naturally creates a much stronger level of support or resistance. Investors would have an easier time breaking through a two-week resistance of a ten thousand contracts than a two-week resistance of the same issue trading hundred thousand contracts.