Support and resistance are key concepts in technical analysis, a method of evaluating securities by analyzing statistical trends and past market data. In the stock market, support and resistance refer to specific price levels that act as barriers for the price of a security.
Support refers to a price level where demand for a security is strong enough to prevent the price from falling further. This is because buyers tend to enter the market at these levels, which results in increased demand and a corresponding increase in price. The existence of support indicates that there is a buying interest in a security at that price level.
Resistance refers to a price level where the supply of a security is large enough to prevent the price from rising further. This is because sellers tend to enter the market at these levels, which results in increased supply and a corresponding decrease in price. The existence of resistance indicates that there is a selling interest in a security at that price level.
Traders and investors use support and resistance levels to determine where to enter and exit trades. If a security’s price approaches a support level, traders may view this as a buying opportunity and enter a long position. Conversely, if a security’s price approaches a resistance level, traders may view this as a selling opportunity and exit their long positions.
Support and resistance levels can be identified through technical analysis techniques, such as trendlines and moving averages (Technical Analysis). These levels can also change over time as market conditions evolve, so traders and investors should continuously monitor support and resistance levels to ensure that their investment strategies remain effective.