Technical analysis in trading involves having to deal with concepts and ideas in order to determine the future direction of prices using past market data. One of the concepts used is support and resistance. It is based on the belief in technical analysis that the price movement of a certain security tends to stop and make a reverse once it reaches pre-determined price levels.

What Is Support and Resistance?

Basically, support and resistance in a chart pattern provides the limits in which a certain security levels off before reversing. Support refers to the price level in which a security usually tends to reverse direction after going down rather than break through it. Resistance on the other hand is that price level in which a security going up usually tends to reverse direction from rather than break through. In a chart pattern, support usually is the floor while the resistance is the ceiling.

Identifying Support And Resistance

Trying to identify support and resistance levels in a chart pattern is usually based on trendlines. There are some traders though that make use of pivot point calculations in order to determine the support and resistance levels of different securities. There are certain ways in which traders can determine the significance of support and resistance levels set. They are:

  • Frequency of Touches. The number of times that a price for a support or resistance level is being tested, the more significant it becomes. If a security bounces off a certain price level, the more often that traders will remember that certain price level and base their trading decisions next time on it.
  • Trading Volume At Price Levels. When there is a higher volume of buying or selling at a certain price level, it usually leads to a stronger the support or resistance level. Investors and traders will usually keep in mind trading at these price levels and will likely be using them again in the future.
  • Rate Of Previous Price Move. Significance of support and resistance levels may also depend on the rate of the previous price move. They usually gain more significance especially if they are preceded with either steep advances or declines because they seem to attract more attention among the traders and investors and then decisions they make.
  • Time Period. The significance of the support and resistance levels of a certain security matter even more the more that each levels have been regularly tested over an extended period of time.

Support and resistance is just one of the many concepts being used in the practice of technical analysis. In itself, it may provide insight on how traders and investors may be able to forecast movements of certain securities. But there are also other factors that traders experienced in technical analysis have to consider. Other tools and methods may be needed as a means to confirm the results and probable movement that determining and looking into support and resistance levels may provide.