Support and resistance levels

Support and resistance are two key concepts in technical analysis that are used to identify potential levels of buying and selling activity in a stock or other financial asset.

Support is a price level at which demand for an asset is strong enough to prevent it from falling further. This means that as the price of an asset approaches a support level, buyers are more likely to enter the market and purchase the asset, driving the price back up. Support levels can be identified by looking at historical price charts and identifying areas where the price has previously bounced back up after falling.

Resistance, on the other hand, is a price level at which the supply of an asset is strong enough to prevent it from rising further. This means that as the price of an asset approaches a resistance level, sellers are more likely to enter the market and sell the asset, driving the price back down. Resistance levels can also be identified by looking at historical price charts and identifying areas where the price has previously bounced back down after rising.

Technical analysis is a method of analyzing financial markets that involves studying historical price charts and identifying patterns and trends that can be used to predict future price movements. Technical analysis is based on the assumption that market trends, including support and resistance levels, are driven by the psychology of market participants and are therefore predictable.

Traders can use support and resistance levels to make trading decisions by looking for buying opportunities near support levels and selling opportunities near resistance levels. For example, a trader might buy a stock when it approaches a support level, with the expectation that the price will bounce back up. Alternatively, a trader might sell a stock when it approaches a resistance level, with the expectation that the price will fall back down. By combining support and resistance levels with other technical indicators and fundamental analysis, traders can develop trading strategies that aim to profit from price movements in financial markets.