Support and resistance

Short description: Economics concept

In stock market technical analysis, support and resistance are certain predetermined levels of the price of a security at which it is thought that the price will tend to stop and reverse.[1] These levels are denoted by multiple touches of price without a breakthrough of the level.

## Contents

* 1 Support versus resistance
* 2 Reactive versus proactive support and resistance
* 3 Identifying support and resistance levels
* 4 See also
* 5 References
* 6 Further reading

## Support versus resistance

A support level is a level where the price tends to find support as it falls due to an increase in demand for the asset. This means that the price is more likely to "bounce" off this level rather than break through it. However, once the price has breached this level, by an amount exceeding some noise, it is likely to continue falling until meeting another support level.[2]

A resistance level is the opposite of a support level. It is where the price tends to find resistance as it rises due to an increase in selling interest. Again, this means that the price is more likely to "bounce" off this level rather than break through it. However, once the price has breached this level, by an amount exceeding some noise, it is likely to continue rising until meeting another resistance level.

A resistance level once broken through or above can develop into a support level. This means that the price will retrace down to the former resistance level and "bounce" off this level.[3]

Traders use support and resistance levels in different chart patterns.[4]

## Reactive versus proactive support and resistance

Proactive support and resistance methods are "predictive" in that they often outline areas where price has not actually been.[5] They are based upon current price action that, through analysis, has been shown to be predictive of future price action.[6] Proactive support and resistance methods include Measured Moves, Swing Ratio Projection/Confluence (Static (Square of Nine), Dynamic (Fibonacci)), Calculated Pivots, Volatility Based, Trendlines and Moving averages, VWAP, Market Profile (VAH, VAL and POC).[5]

Reactive support and resistance are the opposite: they are formed directly as a result of price action or volume behaviour. They include Volume Profile, Price Swing lows/highs, Initial Balance, Open Gaps, certain Candle Patterns (e.g. Engulfing, Tweezers) and OHLC.[5]

A price histogram is useful in showing at what price a market has spent more relative time. Psychological levels near round numbers often serve as support and resistance.[5]

## Identifying support and resistance levels

Support and resistance levels can be identified by trend lines (technical analysis).[7] Some traders believe in using pivot point calculations.[8]

The more often a support/resistance level is "tested" (touched and bounced off by price), the more significance is given to that specific level.[9]

If a price breaks past a support level, that support level often becomes a new resistance level. The opposite is true as well; if price breaks a resistance level, it will often find support at that level in the future.[10]

Psychological Support and Resistance levels form an important part of a trader's technical analysis.[11] As price reaches a value ending in 50 (ex. 1.2050) or 00 (ex. 1.3000), people often see these levels as a strong potential for interruption in the current movement. The price may hit the line and reverse, it could hover around the level as Bulls and Bears fought for supremacy, or it may punch straight through. A trader should always exercise caution when approaching 00 levels in general, and 50 levels if it has previously acted as Support or Resistance.

## See also

* Top (technical analysis)
* Trend line (technical analysis)
* Bottom (technical analysis)
* Price discovery
* Representativeness heuristic
* Fibonacci retracement

## References

1. ↑ Amiri, M.; Zandieh, M.; Vahdani, B.; Soltani, R.; Roshanaei, V. (January 2010). "An integrated eigenvector–DEA–TOPSIS methodology for portfolio risk evaluation in the FOREX spot market". Expert Systems with Applications 37 (1): 509–516. doi:10.1016/j.eswa.2009.05.041.
2. ↑ McLeod, Gregory (21 January 2014). "Forex Support and Resistance Explained". Daily FX. http://www.dailyfx.com/forex/education/trading_tips/chart_of_the_day/2014/01/21/Forex_Support_and_Resistance_Explained.html.
3. ↑ "Trading Support and Resistance with Price Action | PriceAction.com" (in en-US). https://priceaction.com/price-action-university/strategies/support-resistance-levels/.
4. ↑ Zapranis, Achilleas; Tsinaslanidis, Prodromos E. (October 2012). "Identifying and evaluating horizontal support and resistance levels: an empirical study on US stock markets". Applied Financial Economics 22 (19): 1571–1585. doi:10.1080/09603107.2012.663469. ISSN 0960-3107. https://www.tandfonline.com/doi/full/10.1080/09603107.2012.663469.
5. ↑ 5.0 5.1 5.2 5.3 Schlossberg, Boris (2006). Technical Analysis of the Currency Market: Classic Techniques for Profiting from Market Swings and Trader Sentiment. John Wiley & Sons. ISBN 9780471973065.
6. ↑ "Mastering Price Action Trading with Supply and Demand". 2022-11-08. https://maktradingschool.com/best-price-action-trading-strategy-using-supply-and-demand-zones/.
7. ↑ "A Guide To Correctly Drawing Support and Resistance Levels Accurately". http://www.theforexguy.com/how-to-draw-support-and-resistance/.
8. ↑ "Identify support and resistance on a chart". http://www.fxstreet.com/education/learning-center/unit-1/chapter-4/identify-support-and-resistance-on-a-chart/.
9. ↑ "Support and Resistance Levels". Day Trading Encyclopedia. http://speedtrader.com/three-ways-to-find-support-and-resistance-levels/.
10. ↑ Thomsett, Michael C.. "Support and resistance simplified". https://scholar.google.com/scholar_url?url=http://www.traderslibrary.com/ProductPages/Support_and_Resistance_Simplified/634310358481916301.pdf&hl=en&sa=X&scisig=AAGBfm1L2ckh-ulQWnFq8nI-8aB-U0Ep1w&nossl=1&oi=scholarr.
11. ↑ Stanley, James. "The Hidden Patterns of Support and Resistance in the Forex Market". https://finance.yahoo.com/news/hidden-patterns-support-resistance-forex-030000959.html.

## Further reading

* John Murphy, Technical Analysis of the Financial Markets, ISBN 978-0-7352-0066-1

* v
* t
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Technical analysis

Concepts|

* Breakout
* Dead cat bounce
* Dow theory
* Elliott wave principle
* Market trend

Charts|

* Candlestick
* Renko
* Kagi
* Line
* Open-high-low-close
* Point and figure

Patterns|

| Chart|

* Broadening top
* Cup and handle
* Double top and double bottom
* Flag and pennant
* Gap
* Head and shoulders
* Island reversal
* Price channels
* Triangle
* Triple top and triple bottom
* Wedge pattern

|

Candlestick|

| Simple|

* Doji
* Hammer
* Hanging man
* Inverted hammer
* Marubozu
* Shooting star
* Spinning top

|

Complex|

* Hikkake pattern
* Morning star
* Three black crows
* Three white soldiers

Indicators|

| Support &
resistance|

* Bottom
* Fibonacci retracement
* Pivot point (PP)
* Top

|

Trend|

* Average directional index (A.D.X.)
* Commodity channel index (CCI)
* Detrended price oscillator (DPO)
* Know sure thing oscillator (KST)
* Ichimoku Kinkō Hyō
* Moving average convergence/divergence (MACD)
* Mass index
* Moving average (MA)
* Parabolic SAR (SAR)
* Smart money index (SMI)
* Trend line
* Trix
* Vortex indicator (VI)

Momentum|

* Money flow index (MFI)
* Relative strength index (RSI)
* Stochastic oscillator
* True strength index (TSI)
* Ultimate oscillator
* Williams %R (%R)

Volume|

* Accumulation/distribution line
* Ease of movement (EMV)
* Force index (FI)
* Negative volume index (NVI)
* On-balance volume (OBV)
* Put/call ratio (PCR)
* Volume–price trend (VPT)

Volatility|

* Average true range (ATR)
* Bollinger Bands (BB)
* Donchian channel
* Keltner channel
* CBOE Market Volatility Index (VIX)
* Standard deviation (σ)

Breadth|

* Advance–decline line (ADL)
* Arms index (TRIN)
* McClellan oscillator

Other|

* Coppock curve
* Ulcer index

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