Support and resistance levels are key concepts in technical analysis used to predict the price movement of securities. Here’s a breakdown of each:
Support Level:
Definition: A support level is a price point where a stock or other asset tends to stop falling and may even start to rise. It represents a level where buying interest is strong enough to overcome selling pressure.
Function: At support levels, demand is usually high enough to prevent the price from falling further. Traders and investors often view these levels as opportunities to buy, expecting the price to rebound.
Identification: Support levels are identified by looking at historical price data where the asset has repeatedly bounced back or stabilized.
Resistance Level:
Definition: A resistance level is a price point where a stock or other asset tends to stop rising and may start to decline. It represents a level where selling interest is strong enough to overcome buying pressure.
Function: At resistance levels, selling pressure often exceeds buying pressure, making it challenging for the price to break through. Traders and investors may view these levels as opportunities to sell or short the asset.
Identification: Resistance levels are identified by examining historical price data where the asset has repeatedly faced obstacles and reversed direction.
Key Points:
Role Reversal: Once a support level is breached, it can become a new resistance level, and vice versa. For example, if a price falls below a previous support level, that level might now act as resistance if the price tries to climb back up.
Psychological Impact: These levels can also be influenced by market psychology and investor behaviour, as traders often place buy or sell orders around these levels.
Understanding support and resistance levels can help traders make informed decisions about entry and exit points in the market.
Lauren Hua is a private client adviser at Fairmont Equities.
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