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Support and resistance is a widely used concept in technical analysis. The theory behind it states that the price movement of a security will, at certain predetermined point, stop in its tracks and reverse. Read on to find out more about support and resistance.
To understand support and resistance, you must first of all understand that on the financial markets, share prices are frequently moving up and down to different levels. A level at which the price finds support as it descends is called a ‘support’ level. The idea is that a price may bounce off this level, instead of breaking through. Should the price break through, it may continue to descend until it comes across another support level. The level at which a price will find resistance as it ascends is called a ‘resistance’ level. It is thought to be likelier that the price will bounce off the level, instead of breaking through. If the price passes through, it may continue to go up until it finds another resistance level. This is the theory of support and resistance.
Technical analysts identify support and resistance levels through the use of chart lines. The higher the frequency of a support and resistance level being touched and bounced off by the price, the more importance given to it. Should the price break through a current support level, said level may in the future become a resistance level instead. On the other hand, should the price level work through a current resistance level, that resistance level may in the future offer support rather than resistance.
Support and resistance are two highly discussed components of technical analysis. Those learning to trade may find that it takes a while to fully understand support and resistance. As a case in point, between March and November 2006, the price of Amazon stock got close to $39 several times. However, it never reached above this level. Traders would refer to this as a ‘ceiling’, as the price level when near $39 was in fact a level of resistance.
Over time, set support and resistance levels tend to change as markets fluctuate. As part of understanding support and resistance, understanding trends and trend-lines is important. If a market trends to the upside, theory dictates that the price action may slow and pull back to the trend-line, thus creating a resistance level. Such events occur following near-term uncertainty, or indeed profit taking in a particular sector or a particular issue. Following such activity, the price action plateaus or drops off slightly and in so doing will create a short term drop.
If you would like to find out a little more about support and resistance, get in touch with the brokers at Accendo Markets today. Our state of the art trading platform and expert knowledge will equip you with everything you need to start trading and to better understand support and resistance.
The information on this page does not constitute a personal recommendation. It is general in nature and does not take into account your personal circumstances or appetite for risk.