Support and resistance levels help technical traders recognise areas on a chart where an asset’s price movement is more likely to either reverse, or consolidate into a bigger movement. They can also offer extra insight into the strength of a trend.
Identifying support and resistance
Support or resistance levels will often be hit multiple times, but not always in exactly the same spot. As this happens, they turn into general zones or areas of resistance or support.
There are a few different ways to identify support and resistance levels.
The most reliable source for identifying support and resistance levels is usually historical
prices. Typically, significant peaks and troughs in price will be used as notable levels.
You can use previous notable support or resistance levels that have been surpassed as indicators of future movement. If a support level is broken, for instance, it could then turn into a significant resistance level for future moves.
Technical indicators or trend lines can provide dynamic support or resistance levels that move as the chart progresses. For example, moving averages can often provide support or resistance.
Support and resistance levels for different markets will often be based on different factors, and the ability to recognise which levels are going to impact a market’s price takes time to learn. For that reason, it is important to backtest any support or resistance levels you think you have identified on historical charts.