Editing Support and resistance

{{Short description|Economics concept}}
In [[stock market]] [[technical analysis]], '''support and resistance''' are certain predetermined levels of the price of a [[security (finance)|security]] at which it is thought that the price will tend to stop and reverse.<ref name=Integrated1>{{cite journal|last1=Amiri|first1=M.|last2=Zandieh|first2=M.|last3=Vahdani|first3=B.|last4=Soltani|first4=R.|last5=Roshanaei|first5=V.|title=An integrated eigenvector–DEA–TOPSIS methodology for portfolio risk evaluation in the FOREX spot market|journal=Expert Systems with Applications|date=January 2010|volume=37|issue=1|pages=509–516|doi=10.1016/j.eswa.2009.05.041}}</ref> These levels are denoted by multiple touches of price without a breakthrough of the level.

== Support versus resistance ==

A '''support level''' is a level where the price tends to find support as it falls due to an increase in demand for the asset. This means that the price is more likely to "bounce" off this level rather than break through it. However, once the price has breached this level, by an amount exceeding some noise, it is likely to continue falling until meeting another support level.<ref name=DailyFX1>{{cite news|last1=McLeod|first1=Gregory|title=Forex Support and Resistance Explained|url=http://www.dailyfx.com/forex/education/trading_tips/chart_of_the_day/2014/01/21/Forex_Support_and_Resistance_Explained.html|access-date=13 August 2015|publisher=Daily FX|date=21 January 2014}}</ref>

A '''resistance level''' is the opposite of a support level. It is where the price tends to find resistance as it rises due to an increase in selling interest. Again, this means that the price is more likely to "bounce" off this level rather than break through it. However, once the price has breached this level, by an amount exceeding some noise, it is likely to continue rising until meeting another resistance level.

Traders use support and resistance levels in different chart patterns.<ref>{{Cite journal |last=Zapranis |first=Achilleas |last2=Tsinaslanidis |first2=Prodromos E. |date=October 2012 |title=Identifying and evaluating horizontal support and resistance levels: an empirical study on US stock markets |url=https://www.tandfonline.com/doi/full/10.1080/09603107.2012.663469 |journal=Applied Financial Economics |volume=22 |issue=19 |pages=1571–1585 |doi=10.1080/09603107.2012.663469 |issn=0960-3107|url-access=subscription }}</ref>

== Reactive versus proactive support and resistance ==

Proactive support and resistance methods are "predictive" in that they often outline areas where price has not actually been.<ref name=TechnicalAnalysis1>{{cite book|last1=Schlossberg|first1=Boris|title=Technical Analysis of the Currency Market: Classic Techniques for Profiting from Market Swings and Trader Sentiment|date=2006|publisher=John Wiley & Sons|isbn=9780471973065}}</ref> They are based upon current price action that, through analysis, has been shown to be predictive of future price action.<ref>{{Cite web |date=2022-11-08 |title=Mastering Price Action Trading with Supply and Demand |url=https://maktradingschool.com/best-price-action-trading-strategy-using-supply-and-demand-zones/ |access-date=2024-03-03 }}</ref> Proactive support and resistance methods include Measured Moves, Swing Ratio Projection/Confluence (Static (Square of Nine), Dynamic (Fibonacci)), Calculated Pivots, [[volatility (finance)|Volatility]] Based, Trendlines and Moving averages, VWAP, Market Profile (VAH, VAL and POC).<ref name=TechnicalAnalysis1/>

Reactive support and resistance are the opposite: they are formed directly as a result of price action or volume behaviour. They include Volume Profile, Price Swing lows/highs, Initial Balance, Open Gaps, certain Candle Patterns (e.g. Engulfing, Tweezers) and OHLC.<ref name=TechnicalAnalysis1/>

A price histogram is useful in showing at what price a market has spent more relative time. [[Psychological level]]s near round numbers often serve as support and resistance.<ref name=TechnicalAnalysis1/>

== Identifying support and resistance levels ==

Support and resistance levels can be identified by [[trend lines (technical analysis)]].<ref name=ForexGuy1>{{cite web|title=A Guide To Correctly Drawing Support and Resistance Levels Accurately|url=http://www.theforexguy.com/how-to-draw-support-and-resistance/|website=The Forex Guy|access-date=13 August 2015}}</ref> Some traders believe in using [[pivot point (stock market)|pivot point calculations]].<ref name=FXStreet1>{{cite web|title=Identify support and resistance on a chart|url=http://www.fxstreet.com/education/learning-center/unit-1/chapter-4/identify-support-and-resistance-on-a-chart/|website=FX Street|access-date=13 August 2015}}</ref>

The more often a support/resistance level is "tested" (touched and bounced off by price), the more significance is given to that specific level.<ref>{{cite web|title=Support and Resistance Levels|url=http://speedtrader.com/three-ways-to-find-support-and-resistance-levels/|website=Investors Underground|publisher=Day Trading Encyclopedia|access-date=29 June 2016}}</ref>

If a price breaks past a support level, that support level often becomes a new resistance level. The opposite is true as well; if price breaks a resistance level, it will often find support at that level in the future.<ref name=GoogleSchoalr1>{{cite web|last1=Thomsett|first1=Michael C.|title=Support and resistance simplified|url=https://scholar.google.com/scholar_url?url=http://www.traderslibrary.com/ProductPages/Support_and_Resistance_Simplified/634310358481916301.pdf&hl=en&sa=X&scisig=AAGBfm1L2ckh-ulQWnFq8nI-8aB-U0Ep1w&nossl=1&oi=scholarr|website=Google Scholar|access-date=13 August 2015}}</ref>

Psychological Support and Resistance levels form an important part of a trader's technical analysis.<ref name=YahooFInance1>{{cite web|last1=Stanley|first1=James|title=The Hidden Patterns of Support and Resistance in the Forex Market|url=https://finance.yahoo.com/news/hidden-patterns-support-resistance-forex-030000959.html|website=Yahoo! Finance|access-date=13 August 2015}}</ref> As price reaches a value ending in 50 (ex. 1.2050) or 00 (ex. 1.3000), people often see these levels as a strong potential for interruption in the current movement. The price may hit the line and reverse, it could hover around the level as Bulls and Bears fought for supremacy, or it may punch straight through. A trader should always exercise caution when approaching 00 levels in general, and 50 levels if it has previously acted as Support or Resistance.

==See also==
*[[Top (technical analysis)]]
*[[Trend line (technical analysis)]]
*[[Bottom (technical analysis)]]
*[[Price discovery]]
*[[Representativeness heuristic]]
*[[Fibonacci retracement]]

==References==
{{Reflist}}

==Further reading==
*[[John Murphy (economist)|John Murphy]], Technical Analysis of the Financial Markets, {{ISBN|978-0-7352-0066-1}}

{{technical analysis}}

[[Category:Chart overlays]]