Support and
resistance is a concept in technical analysis that the price
of a security will tend to stop and reverse at certain
predetermined price levels.
A support level is a price level where the price tends to find
support as it is going down. This means the price is more
likely to "bounce" off this level rather than break through
it. However, once the price has passed this level, even by a
small amount, it is likely to continue dropping until it finds
another support level.
A resistance level is the opposite of a support level. It is
where the price tends to find resistance as it is going up.
This means the price is more likely to "bounce" off this level
rather than break through it. However, once the price has
passed this level, even by a small amount, it is likely that
it will continue rising until it finds another resistance
level.
Support and resistance levels can be identified by trend
lines. Some traders believe in using pivot point calculations.
The more often a support/resistance level is "tested" (touched
and bounced off of by price), the more significance given to
that specific level.
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.
When judging entry and exit investment investment timing using
support or resistance levels it is important to choose a chart
based on a price interval period that aligns with your trading
strategy timeframe. Short term traders tend to use charts
based on interval periods, such as 1 minute (i.e. the price of
the security is plotted on the chart every 1 minute), with
longer term traders using price charts based on hourly, daily,
weekly or monthly interval periods. Typically traders use
shorter term interval charts when making a final decisions on
when to invest, such as the following example based on 1 week
of historical data with price plotted every 15 minutes. In
this example the early signs that the stock was coming out of
a downtrend was when it started to form support at $30.48 and
then started to form higher highs and higher lows signalling a
change from negative to positive trending. |
