This is a fundamental technical analysis guide on one of the core indicators in trading. Support and resistance levels.
Read on to find out what support and resistance indicators show, how you can use them to better identify potential entry and exit strategies, and what it means when these lines are ‘broken’.
Contents
We use example charts for our technical analysis guides, be sure to use them to get a visual idea of what we’re talking about.
What Are Support And Resistance Indicators?
Support and Resistance is one of the most important and fundamental parts of technical analysis:
- Support: Typically expected that prices should rise after touching support.
- Resistance: Generally expected that prices should fall after hitting resistance.
How To Spot Potential Buy Signals
It is a general expectation that when prices touch a historical level of support, prices will cease the negative momentum downward and reverse course.
Hence a potential buy signal could be triggered when the price touches the support line.
How To Spot Potential Sell Signals
If prices reach a historical price ceiling (resistance), typically it is expected that prices will stop at that level unless some other external impetus like great earnings can send prices past historical resistance.
Therefore, a potential sell signal is triggered when the price touches the historical resistance line.
What Does It Mean To ‘Break Support Or Resistance’?
Another fundamental concept of support and resistance is listed next and is shown in the chart below of Alcoa (AA) stock:
This is where we distinguish between what it means to break support and resistance levels:
- If price breaks below support, then that support level can become the new resistance level.
- If price breaks above support, then that resistance level can become the new support level.
Do Traders Use Support And Resistance Frequently?
Support and Resistance are basic yet vitally important technical analysis tools.
On every time frame, intra-day, daily, weekly, and monthly, traders focus on support and resistance levels.
Knowledge of these levels could help keep a trader on the profitable side of the market.
Where To Start Trading And Practicing
If you are interested in trading using technical analysis, have a look at our reviews of these regulated brokers available in to learn which charting tools they offer:
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74%-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.
Further Reading
Learn more about technical analysis charting concepts, strategies and indicators including Moving Averages, the Relative Strength Index, and Stochastics.
Also, see our guide to understanding the basics of reading candlestick charts and option trading strategies.
If you’d like to learn about what instruments you can trade and practice support and resistance analysis with, see our guides on CFDs, options, stocks, forex, cryptocurrencies, and bullion dealers.
