What are Support and Resistance?
Support is a price level where buying interest is strong enough to prevent further decline, while resistance is a level where selling pressure caps upward movement. These levels form because traders remember prices at which they previously bought or sold, creating clusters of orders. A stock that has bounced off $50 three times over six months establishes $50 as a strong support level. When support breaks, it often becomes resistance, and vice versa, a phenomenon called polarity.
Identifying and Trading Key Levels
The most reliable support and resistance levels are those tested multiple times on high volume. Round numbers ($100, $50) act as psychological barriers. Previous highs and lows, moving averages (especially the 200-day), and volume profile nodes all serve as dynamic support and resistance. Breakout traders enter positions when price decisively closes beyond a level on above-average volume, while range traders buy at support and sell at resistance within established channels.
Key Considerations
Support and resistance are zones rather than exact prices. A stock with support at $50 might dip to $49.50 before bouncing, so placing stop-losses exactly at the level often results in premature exits. False breakouts are common, particularly in low-volume environments. Waiting for a candle close beyond the level, or requiring volume confirmation, reduces the frequency of being trapped by false moves. The longer a level holds and the more times it is tested, the more significant the eventual breakout tends to be.