Support and Resistance
The foundation of technical analysis — horizontal price levels where buying or selling pressure is concentrated, causing price to pause, reverse, or break through.
Overview
Support and resistance are among the most important concepts in technical analysis. They represent price levels where the forces of supply and demand meet.
A price level where buying interest is strong enough to overcome selling pressure, preventing price from falling further. Think of it as a "floor" where buyers step in.
A price level where selling interest is strong enough to overcome buying pressure, preventing price from rising further. Think of it as a "ceiling" where sellers step in.
Key Principle: Support and resistance levels are not exact prices but rather zones or areas. Price may slightly overshoot or undershoot these levels.
The Psychology Behind Support and Resistance
Why do support and resistance levels work?
Memory and Market Participants
Traders remember where price reversed before. When price approaches these levels again, three groups emerge:
- • Buyers who missed out: Waiting to buy at that "good price" again
- • Buyers who are losing: Hoping to exit breakeven at that level
- • Sellers who profited: Looking to sell again at that profitable level
Round Numbers (Psychological Levels)
Humans gravitate toward round numbers. $100, $50, $200 become natural areas where traders place orders. This creates concentrated buying/selling interest.
Institutional Orders
Large institutions place massive buy/sell orders at specific levels. When price reaches these levels, the orders get executed, causing support or resistance.
How to Identify Support and Resistance
1. Historical Swing Points
The most common method — find previous swing highs and swing lows:
Support: Previous swing lows where price bottomed and reversed upward
Resistance: Previous swing highs where price peaked and reversed downward
The more times price has bounced from a level, the stronger it becomes
2. Round Numbers and Psychological Levels
Major round numbers act as natural support/resistance:
- • Whole numbers: $50, $100, $150, $200
- • Half levels: $25, $75, $125, $175
- • Major milestones: $1,000 for high-priced stocks
Example: A stock at $98 will likely find resistance at $100
3. Moving Averages as Dynamic S&R
Moving averages act as support/resistance that moves with price:
- • 20-day MA: Short-term support/resistance
- • 50-day MA: Medium-term support/resistance
- • 200-day MA: Long-term support/resistance (very significant)
In uptrends, price often pulls back to the 20/50 MA before continuing higher
4. Previous Breakout Levels
When resistance is broken, it often becomes support (and vice versa). This is called "role reversal" or "polarity."
Example: Stock breaks above resistance at $150. Later, when price pulls back, $150 now acts as support.
5. Fibonacci Retracement Levels
Common retracement levels where price often finds support/resistance:
- • 23.6% retracement: Shallow pullback
- • 38.2% retracement: Common in strong trends
- • 50% retracement: Psychological midpoint
- • 61.8% retracement: Golden ratio, deep pullback
6. Volume Profile / Volume at Price
Price levels where significant volume traded in the past act as support/resistance. High volume nodes show where many traders have positions.
What Makes Support/Resistance Strong?
The more times price has bounced off a level, the stronger it becomes. 3+ touches = strong level.
Support/resistance on weekly charts is stronger than on 5-minute charts. Higher time frames = more significant levels.
High volume at a support/resistance level indicates strong interest. More traders have positions there, creating stronger defense.
Recent support/resistance levels are more relevant than those from years ago. Market participants remember recent levels better.
When multiple factors align (e.g., previous swing low + 200 MA + Fibonacci 61.8%), the level becomes extremely strong.
Psychological levels ($100, $50, etc.) are inherently stronger because traders naturally gravitate to them for orders.
Trading Strategies Using Support and Resistance
1. Bounce Trading (Mean Reversion)
Strategy: Buy at support, sell at resistance in ranging markets
Setup: Identify clear support/resistance zones with multiple touches
Entry (Long): When price touches support and shows reversal signals (bullish candles, RSI oversold)
Entry (Short): When price touches resistance and shows reversal signals
Stop Loss: Just beyond the support/resistance level
Target: Opposite side of the range
Best for: Ranging, sideways markets
2. Breakout Trading
Strategy: Enter when price breaks through support/resistance
Setup: Price consolidating at resistance/support, building pressure
Entry: When price closes beyond the level with strong volume
Confirmation: Look for increased volume on the breakout (2-3x average)
Stop Loss: Back inside the broken level
Target: Measured move (distance of consolidation added to breakout point)
Best for: Trending markets, strong momentum
3. Retest Trading (Pullback after Breakout)
Strategy: Enter on pullback to broken level after breakout
Setup: Price breaks resistance, then pulls back to test it as new support
Entry: When price bounces off the retested level (role reversal)
Why it works: Offers better risk/reward than chasing the initial breakout
Stop Loss: Below the retested support (above for shorts)
Best for: Conservative traders who miss initial breakouts
4. False Breakout Trading (Fakeout)
Strategy: Trade against false breakouts that quickly reverse
Setup: Price breaks level but immediately reverses back inside
Entry: When price closes back inside the range after failed breakout
Stop Loss: Beyond the false breakout high/low
False breakouts often lead to strong moves in opposite direction as trapped traders exit
Role Reversal: Support Becomes Resistance (and Vice Versa)
One of the most powerful concepts in technical analysis: when a support level is broken, it often becomes resistance. When resistance is broken, it often becomes support.
Example: Support → Resistance
- 1. Stock has support at $80 (bounced 3 times)
- 2. Price breaks below $80 with volume
- 3. Later, when price rallies back to $80, it faces resistance
- 4. Why? Traders who bought at $80 want to exit breakeven
Example: Resistance → Support
- 1. Stock has resistance at $120 (rejected 3 times)
- 2. Price breaks above $120 with volume
- 3. Later, when price pulls back to $120, it finds support
- 4. Why? Traders who sold at $120 want to buy back at that level
This phenomenon makes retests excellent trading opportunities with well-defined risk.
Common Mistakes
Treating S&R as Exact Prices
Problem: Support/resistance are zones, not precise levels. Expecting exact bounces leads to missed trades
Solution: Use zones (e.g., $98-$100 instead of $100). Allow for minor overshoots/undershoots
Drawing Too Many Levels
Problem: Chart becomes cluttered with every minor swing, losing sight of major levels
Solution: Focus on levels with 3+ touches, high volume, or confluence. Remove weak levels
Ignoring Volume on Breaks
Problem: Breakouts without volume often fail. Entering breakouts without volume confirmation leads to losses
Solution: Only trade breakouts with 2-3x average volume. Low volume breaks are likely false
Not Waiting for Confirmation
Problem: Entering immediately when price touches S&R, without waiting for reversal signals
Solution: Wait for bullish/bearish candles, RSI divergence, or other confirmations before entering
Forgetting Role Reversal
Problem: Missing excellent retest trading opportunities after breakouts
Solution: Mark broken S&R levels and watch for retests. These offer great risk/reward entries
Best Practices
Identifying Strong Levels
- • Look for 3+ touches minimum
- • Higher time frames = stronger levels
- • Check volume at the level
- • Recent levels more relevant
- • Confluence with MAs, Fibonacci
Trading Bounces
- • Wait for reversal confirmation
- • Use candlestick patterns (pin bars, engulfing)
- • Check RSI for oversold/overbought
- • Stop loss just beyond S&R level
Trading Breakouts
- • Require strong volume (2-3x average)
- • Wait for close beyond level
- • Look for retest entry for better R:R
- • Measure targets from consolidation
Multi-Timeframe Analysis
- • Mark major S&R on weekly/daily
- • Use lower TF for entry timing
- • Respect higher TF levels more
- • Confluence = highest probability
Advanced Concepts
Supply and Demand Zones
More advanced than simple S&R — identify zones where institutions placed large orders:
- • Demand Zone: Area where price sharply rallied from (strong buying)
- • Supply Zone: Area where price sharply dropped from (strong selling)
- • These zones often lead to explosive moves when revisited
Order Blocks
Institutional-level support/resistance where smart money placed orders:
- • Last bullish candle before sharp drop = bearish order block (resistance)
- • Last bearish candle before sharp rally = bullish order block (support)
- • High probability reversal zones when price returns
Liquidity Zones
Areas above resistance and below support where stop losses cluster. Smart money often "hunts" these stops before reversing, creating false breakouts (stop hunts).
Summary
Support and resistance are the backbone of technical analysis. Every chart pattern, indicator, and strategy ultimately relates back to these fundamental concepts.
- • Support and resistance are zones, not exact prices
- • The more touches, the stronger the level (3+ ideal)
- • Volume confirms the strength of breaks and bounces
- • Broken support becomes resistance, broken resistance becomes support
- • Higher time frame levels are more significant than lower time frame levels
- • Confluence with other factors creates the strongest levels
Master Principle: Support and resistance exist because of human psychology and market memory. They work because enough traders believe in them and act on them, creating self-fulfilling prophecies. Identify the levels where the crowd is watching, and you'll find the best trading opportunities.