The Basics of Support and Resistance

Apr 27, 2009: 7:10 PM CST

The concepts of “Support” and “Resistance” in the marketplace are as common as bread and water – scarcely a trading day goes by when you don’t encounter these concepts in some form or another.  How do we accurately define these terms?

Support is known as an area where price is expected to cease declining and form a reversal, inflecting back to the upside.
Resistance is known as an area where price is expected to cease rising and form a reversal, inflecting back to the downside.

Support and Resistance Example

It is generally better to refer to these concepts as “price areas” rather than exact price points, and allow wiggle-room should price violate expected support by a fraction.

There are a variety of methods one can use to determine expected areas of support or resistance, from moving averages, to trendlines, pivot points, previous market highs or lows, Fibonacci levels, or chart patterns.

Ultimately, you will likely place stops and targets or enter trades at areas you believe will hold as support or resistance.  If you are correct in your assessment, you will have identified a low-risk trade set-up.

Support and Resistance adhere to the hierarchy of timeframes, meaning support levels on a monthly or weekly chart will be more valid (or significant) than those on a daily or intraday timeframe.

Also, Support and Resistance adheres to the “Polarity Principle,” wherein old support levels, once broken “change polarity” and are expected to become new resistance should they be tested again (and vice versa).

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