Support and Resistance Levels

Imagine a price chart is like a ball bouncing between a floor and a ceiling. In trading, these floors and ceilings are called support and resistance levels. They are fundamental concepts that help traders predict where a price might stop and possibly reverse.

Support: The Price Floor

A support level is a price where a falling asset tends to stop its decline and may even start to rise. It's a "price floor" created by a concentration of demand. When the price drops to this level, enough buyers step in to stop the fall and "support" the price. Think of it as a line of buyers ready to catch the falling price.

Resistance: The Price Ceiling

A resistance level is the opposite. It's a price where a rising asset tends to stop its rally and may start to fall. It's a "price ceiling" created by a concentration of supply. When the price rises to this level, enough sellers step in to "resist" the price increase, causing it to fall. Think of it as a line of sellers ready to push the price back down.

Why Do They Work?

Support and resistance levels are driven by human psychology and market memory. When a price hits a certain level and bounces off it, traders remember that level. If the price returns to that level, they expect the same thing to happen again, creating a self-fulfilling prophecy.

The Crossover: From Support to Resistance (and Vice Versa)

These levels aren't permanent. When a strong price movement breaks through a support or resistance level, it often "flips roles."

If the price breaks above a resistance level, that level often becomes a new support.

This concept is crucial for understanding how trends evolve and for finding new trading opportunities.

How to Use Them

Traders use support and resistance in several ways:

For Exits: You might sell near a resistance level, anticipating a reversal.

• For Breakouts: You might trade in the direction of a trend after the price breaks convincingly through a support or resistance level, signaling that the trend is strengthening.

Understanding these levels is like having a map of the market's key battlegrounds between buyers and sellers. It's a simple but powerful tool for any trader.