Support and resistance are price levels or zones where buying and selling activity has previously influenced price movement. Note that:
- “Support” is an area where selling pressure has previously weakened, and buying interest has emerged.
- “Resistance” is an area where buying pressure has previously weakened, and selling activity has emerged.
What is Support and Resistance Trading?
In support and resistance trading, traders study how the price behaves around these zones. They may observe whether the price:
- Repeatedly reacts at a level
- Breaks through it, or
- Returns to test it after a breakout.
A support level that breaks can sometimes become resistance, while a resistance level that breaks can sometimes act as support. This behaviour is usually referred to as a “role reversal”.
How to Draw Support and Resistance Levels?
Traders may start by identifying areas where the price has repeatedly reversed or paused. Generally, the following steps are performed to draw support and resistance levels:
- Look at Historical Price Action: Identify previous highs, lows, and areas where the price changed direction.
- Find Repeated Reactions: Give more attention to areas where the price has reacted multiple times.
- Mark a Zone: Draw a horizontal line or zone around the relevant price area rather than assuming one exact price.
- Check Different Timeframes: A level visible on a daily or weekly chart may carry different significance from one visible only on a shorter timeframe.
- Observe Subsequent Price Action: Monitor whether the price respects, breaks, or retests the marked zone.
Note: Support and resistance levels are based on historical price behaviour. They can change as new market information and trading activity develop.
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