Understanding Support and Resistance - A Hidden Weapon Every Trader Must Know

If you’re a trader who only trembles when seeing price movements but don’t know where to invest, you might be missing important information. Understanding support and resistance is half of trading success. This method helps you find advantageous buy and sell points without relying solely on luck or random guesses.

Basics of Support and Resistance: Origin and Meaning

Before you can truly benefit from support and resistance, you need to understand what they are.

Support is the price zone where, during a downtrend, the price stops falling and is likely to reverse upward. This point can be seen as a “floor” that the price doesn’t want to go below.

Resistance is the price zone where, during an uptrend, the price stops rising and is likely to reverse downward. Think of it as a “ceiling” for the price.

When strong support and resistance levels are tested multiple times with high trading volume, they can sometimes break. When a strong support level is broken, it can turn into a strong resistance level, and vice versa.

Why Are Support and Resistance Important: Economic and Psychological Perspectives

Price movements don’t happen by chance. There are two perspectives explaining why support and resistance are influential.

From an Economic Perspective

In economics, price and value move due to demand (Demand) and supply (Supply).

When there is excess supply, prices are pushed down until demand increases enough to offset the excess supply. This point is called support.

Similarly, when there is excess demand, prices are pushed up until supply catches up, creating a resistance level.

From a Psychological Perspective: Market Sentiment and Emotions

Besides economics, psychology plays an equally important role. The market consists of three groups:

1. Buyers – who buy and wait for prices to go up
2. Sellers – who sell and wait for prices to go down
3. Uncommitted traders – who are waiting to enter

When prices fall to a level perceived as “cheap enough,” existing buyers buy more, short sellers cover their positions, and uncommitted traders see an opportunity. This creates a psychological support level.

Conversely, when prices rise to a “high enough” point, existing buyers may start to sell, short sellers may add to their positions, and uncommitted traders may sell, creating a psychological resistance level.

Practical Tools: How to Accurately Find Support and Resistance

Now that you understand what support and resistance are, let’s look at some tools that can help you find them quickly.

Using Trendlines

For trending prices, visual inspection can be tricky. Trendlines help clarify the picture.

In an uptrend, draw a line through higher lows (Higher Low) to identify support, and through higher highs (Higher High) for resistance.

In a downtrend, draw a line through lower highs (Lower High) for resistance, and through lower lows (Lower Low) for support.

Round Numbers

Numbers ending with 0, such as $10, $100, $1,000, have a psychological impact on traders.

When prices reach $10, many see it as “cheap,” and if it drops below to $9, that level becomes a psychological support. Conversely, when prices rise from $99 to $100, even a $1 increase can feel significant, creating a psychological resistance.

Moving Averages

Moving averages (MA) are averages of closing prices over a specified period, like MA 10 days or MA 20 days.

They can act as support or resistance levels, especially when the trend is clear. In an uptrend, prices tend to stay above the MA, making it a support level. In a downtrend, prices stay below the MA, acting as resistance.

Fibonacci Retracement

Fibonacci retracement uses ratios derived from the Fibonacci sequence: 23.6%, 38.2%, 61.8%, and 78.6%. These levels are believed to be potential reversal points.

For example, if a stock rises from $10 to $20 and then retraces 23.6%, it might find support around $17.64. Conversely, if a stock drops from $100 and retraces 23.6%, it might face resistance around $123.60.

Price Gaps

Price gaps are areas where no trading occurs due to sudden jumps in price, divided into:

• Breakaway Gap – occurs at the start of a new trend with high volume
• Runaway or Common Gap – occurs within a trend and often gets filled
• Exhaustion Gap – appears near trend end, often followed by reversal

In an uptrend, a gap that doesn’t fill can become a strong support. In a downtrend, a gap that doesn’t fill can become a strong resistance.

Practical Trading Strategies

Once you know how to identify support and resistance, you can apply them in your trading.

Trading Range

When prices move within a range between support and resistance without a clear trend, buy at support and sell at resistance to profit from oscillations.

Reversal Trading

When prices hit resistance in an uptrend, they may reverse downward, so consider selling. When prices hit support in a downtrend, they may reverse upward, so consider buying.

Breakout Trading

When prices break through a strong resistance with high volume, the previous resistance becomes new support. The strategy is to buy on the breakout or on a retest of the new support.

Similarly, in a downtrend, if prices break below support with high volume, the support turns into resistance, and you might consider selling.

Important Cautions

While support and resistance are valuable tools, be aware of the following:

Don’t Fight the Trend

The classic rule is “the trend is your friend.” Avoid trading against the main trend unless you have strong confirmation and risk management.

Beware of False Breakouts

Sometimes prices appear to break support or resistance but quickly reverse. Use stop-loss orders to protect yourself.

Watch Out for Old Levels

Support and resistance levels that have held for a long time may eventually give way to new trends. Manage your risk accordingly.

Summary

Understanding support and resistance is fundamental to successful trading. This article explained their origins, how to identify them, and how to apply them. However, mastering these concepts requires practice and observation in real market conditions. The more you practice, the more proficient you’ll become in using support and resistance levels.