Support and resistance

Support and resistance levels are a key element of technical analysis, providing important information about potential price reversal points.

1. What does support mean?
2. What does resistance mean?
3. Why are support and resistance levels significant?
4. The difference between major and less significant support and resistance levels
5. How can support turn into resistance?
   

What does support mean?

Support represents a price level on the chart where the market bounces back during a decline. If the price of an asset is falling but always hits a certain limit that it doesn't break below, it means that the market reacts at this level, and the price bounces back upward from it.

When the price reaches the support level, sellers are unable to push the price lower. This level might be seen as a buying opportunity, which often leads to a trend reversal upwards.

Support represents a price level on the chart where the market bounces back during a decline. If the price of an asset is falling but always hits a certain limit that it doesn't break below, it means that the market reacts at this level, and the price bounces back upward from it.

When the price reaches the support level, sellers are unable to push the price lower. This level might be seen as a buying opportunity, which often leads to a trend reversal upwards.

Support is not only found in declining markets

Support levels can also form in rising markets, where after a small correction, the price finds support and continues moving upward. These areas can be identified on charts within the support range. They are often referred to as the base or the floor of the market.

What does resistance mean?

Resistance represents the price level that is best reached to form a new high. It is the exact opposite of support.

When the price of an asset reaches this level, sellers enter the market, preventing further growth and pushing the price back down.

Just like support, resistance levels can also occur in both bullish and bearish markets.

They are often referred to as the price ceiling, which represents the boundary that the market struggles to break through.

Occasionally, the market may be in a so-called range-bound state, meaning it is bouncing between support and resistance levels, unable to break out of this range.

Why are support and resistance important?

Many traders use support and resistance levels to better plan their entries and exits from trades.

• A simple example could be a situation where the support level has been tested multiple times but has not been broken. This might signal a buying opportunity for traders.

• Opening a long position near support allows traders to profit if the market bounces back upward.

• Selling near the resistance level can be advantageous if the price starts to decline from this area, allowing traders to profit from a downward reversal.

When deciding to close a position, identifying a price level where a trend reversal might occur can help maximize profits or limit losses.

However, it is important to note that support and resistance levels are not fixed and can be broken. If the market breaks through an established support or resistance area, it often continues moving toward the next significant level.

This leads to the approach of entering a trade when support or resistance is broken, with the aim of trading the continuation of the move in the direction of the breakout.

It’s essential to keep in mind that no strategy is without risk. The market can be influenced by various factors that may cause unexpected price movements.

The difference between major and less significant support and resistance levels

Not all support and resistance levels have the same strength. Minor levels may temporarily slow down the price increase or decrease within the existing trend, but they do not stop it completely. A major level can be so significant that it can fully halt or even reverse the direction of the market.

The more times the market bounces off a support or resistance level, the stronger that level becomes

For example, if a currency pair like EUR/USD repeatedly tries to go above 1.155 EUR but does not reverse downward, it could eventually become resistance. The more failed attempts or breakouts that happen, the more likely it is that this level will be seen as a key barrier to further growth.

Traders' thinking often contributes to strengthening support and resistance levels. For instance, if EUR/USD bounces off 1.1965, many traders might start opening short positions in that area, further solidifying this price level as strong resistance.

If the market successfully breaks through a significant level, it often continues moving in that direction, leading to a strong price movement. This phenomenon is called a breakout.

That’s almost everything about support and resistance, but there is one more important aspect to keep in mind.

Support can turn into resistance

It is often the case that a support level in a declining market turns into resistance when the market sentiment changes. The previous resistance could then work as new support.

Referring back to the earlier example, minor levels of resistance can turn into lower support levels and vice versa. This phenomenon can be useful when planning a trading strategy, as analyzing these price movements can give insights into where the market might go in the future.