Support and Resistance
Support level refers to a price level that an asset does not go below over a period of time. In contrast, resistance level represents a price level that an asset encounters difficulties on its ascending trend. Both of these terms are mostly used in technical analysis.
When it comes to visualizations, the resistance level can be outlined by drawing a line along the highest highs for the considered period of time. Similarly, the support level can be outlined by drawing a line along the lowest lows for the considered period of time.
What do support and resistance levels tell you?
When the price of an asset starts falling towards its support level, either the support holds and it is confirmed, or the price continues to decline and the previously demonstrated support level must be adjusted to reflect the new lows. A similar process happens when the price of an asset rises towards its resistance level. The resistance is either demonstrated, or the price surpasses it and the new resistance level gets adjusted. Support and resistance levels can be created using limit and stop orders (we will talk about these in the next post), or they can be simply determined by the behaviour of investors and traders.
When the price of an asset encounters either support or resistance level, it is considered to be a trading opportunity.