A stock stalls at $52 in March, again in June, and again in September. Nothing about $52 is special. What is special is that a group of people remember it, and every one of them has an order sitting near that number. Support and resistance levels are the record of where buyers and sellers previously changed their minds, which is why they keep showing up on the same chart.
What support and resistance are
StockCharts defines both precisely. Support is "the price level at which demand is thought to be strong enough to prevent the price from declining further". Resistance is "the price level at which selling is thought to be strong enough to prevent the price from rising further" (StockCharts).
Both words describe an imbalance rather than a barrier. As price falls towards support, buyers become more willing and sellers less so, until the decline stops. As price rises towards resistance, sellers become more willing and buyers less so, and the advance stalls.
Who is doing the buying and selling
At a support level, several groups reach for the same prices. Traders who watched the last bounce go without them are waiting for a second chance. Short sellers who are in profit close their positions, which means buying. And investors who left a buy order below the market get filled.
At a resistance level the reverse happens. Traders who missed the last top are waiting to sell, holders in profit start closing, and the supply of shares offered at that price exceeds what buyers will absorb.
Types of support and resistance
Horizontal levels
The kind to draw first, and the easiest to test against history.
Previous highs become resistance. Previous lows become support. To find them, zoom out on a daily or weekly chart and mark the peaks and troughs that stand out without you having to search. Then draw a horizontal line through as many of them as one line reaches. If a level takes work to find, it is not the level anybody else is watching either.
Trendlines
A trendline is a level that moves. In an uptrend, connect two or more higher lows and extend the line; in a downtrend, connect two or more lower highs. Price reacting at the line is the trend behaving as drawn, and a close through it says the rate of the trend has changed.
Two points define a line, and the third touch is the first piece of evidence that anyone else is using it.
Moving averages
Moving averages act as levels that recalculate every day: the 20-day for short-term reactions, the 50-day for the intermediate trend, the 200-day for the long-term one. Their advantage over a drawn line is that everybody's 50-day average is in the same place, while no two traders draw the same trendline.
Round numbers
Round numbers appear in the prices people quote and in the orders they place: whole dollars, and multiples of ten, fifty and a hundred. That is reason enough to mark $50 and $100 on a chart before you go looking for anything else. Whether a given round number holds is a question the chart answers, not the number.
How to judge a level
Touch count is not a strength meter
The common rule says a level with five touches is stronger than a level with two. The reasoning goes both ways, and the source above gives no scale for it: it treats a second test as establishing a level and stops there. More touches mean more traders have noticed the level. They also mean each test has absorbed some of the orders resting there, so there is less left to stop price the next time.
What holds without inventing a number is the definition itself. A price that has turned the market twice is something you have observed happen twice; a price that turned it once is a single event. Beyond that, read the rest of the chart rather than counting touches.
Confluence
Two different kinds of level at the same price make a stronger case than either alone. Two groups of traders arrive at the same number by different routes:
- A horizontal level sitting on the 50-day moving average.
- A prior high at a round number.
- A trendline meeting a horizontal level.
Volume
Heavy volume at a level means many shares changed hands there, so more people have a position with that price as their reference. That memory is the mechanism, and it is the reason a high-volume level tends to produce a reaction when price returns to it.
Timeframe
A weekly level is built from five sessions of trading rather than one, so more shares changed hands around it. For swing trading, mark levels on the weekly chart and trade them on the daily.
Trading support levels
Buying at support
- Price approaches a level you marked before it got there, not one you drew today.
- Wait for a bar that closes back up off the level. Buying the approach is buying before the level has done anything.
- Check whether anything else agrees: an oversold RSI, a divergence, volume falling as price drifts in.
- Buy the close or the next open. Put the stop under the level, far enough that ordinary noise does not reach it.
How far under is the decision that sets your position size. Use the stock's average daily range to set that distance rather than a fixed percentage, because the same percentage means different things on a quiet stock and a volatile one.
The exit reference is the previous swing high or the next resistance level above.
Buying the bounce
The lower-risk version waits one more day. Price touches support, closes up off it, and the following session follows through on rising volume. You pay a worse price for a confirmed bounce, and the trade-off is a lower failure rate. The 20-day moving average turning up under the bounce is one more piece of agreement. Which of the two suits you is something your own results will tell you.
Trading a support break
When price closes below a level on heavy volume, the trade is the other way. StockCharts explains why: a broken support means "the forces of supply have overcome the forces of demand", so the level is expected to hold as resistance if price comes back to it. Sell longs on the break, and place the stop for any short above the broken level.
Trading resistance levels
Selling into resistance
Price reaches a marked level, prints a bar that closes back down off it, RSI reads overbought, and a volume spike goes nowhere. That is the point to close a long, or to open a short with the stop above the level.
Trading a breakout
- Price closes above the level, on volume clearly above its recent average.
- The next session holds the gain rather than giving it straight back.
- Buy the close of the break, or wait for the pullback that retests the level from above.
- Place the stop below the broken level, which is now expected to act as support.
For the exit, the measured move is the usual reference: take the height of the range price just left and project it up from the breakout point. The next resistance level above is the other reference, and whichever is closer is the one that matters.
When support becomes resistance
A broken level does not disappear, it changes sides. StockCharts puts the mechanism on the demand side too: "The breakout above resistance proves that the forces of demand have overwhelmed the forces of supply", so a broken resistance level can act as support afterwards.
There is a second reason, and it is about the people rather than the shares. Traders who bought at what used to be support are now holding a loss. When price climbs back to the level, they sell to get out even, and that supply is what turns the old support into resistance.
Trading the flip
Long, after resistance breaks. The level gives way on volume, price pulls back to test it from above, and holds. Buy the hold, with the stop below the level.
Short, after support breaks. The level gives way, price rallies back to it from below, and stalls. Open the short on the stall, with the stop above the level.
Common support and resistance mistakes
Drawing too many levels
A chart with fifteen lines on it supports whatever you already decided to do. Keep the levels that turned price more than once and delete the rest.
Treating every level as an exact price
The answer depends on the chart in front of you. StockCharts distinguishes the two cases: tight ranges lasting under two months suit exact levels, while ranges running many months with large swings suit zones. Match the precision of your line to the size of the swings you are drawing it through.
Buying dips at broken support
Once a support level breaks, buyers at that price are the ones underwater, and their selling is what price now has to get through. The level has changed sides. Trade it as resistance until it proves otherwise.
Reading price without volume
A bounce on thin volume and a bounce on heavy volume look identical on a line chart and mean different things. Volume tells you how many people participated in making the level.
Working from one timeframe
A daily level can sit in the middle of a weekly range, which explains why price cuts through it without pausing. Check the weekly chart before you commit to a daily line.
Support and resistance quick reference
| Scenario | What to do | Stop | Exit reference |
|---|---|---|---|
| Price approaching support | Wait, do not buy the approach | Below the level | The next resistance |
| Price closes up off support | Buy the confirmation | Below the level | The next resistance |
| Price closes below support | Sell longs, or short the break | Above the broken level | The next support below |
| Price approaching resistance | Prepare to close longs | Above the level | The nearest support |
| Price closes above resistance | Buy the breakout | Below the broken level | The measured move |
| Pullback into broken resistance | Buy the hold | Below the level | Prior highs |
Turn your levels into a record
A support bounce, a breakout and a polarity flip are three trades with different hold times and different reasons to fail. Which one pays in your hands is a question about your trades, not about the chart in the article.
Swingfolio lets you put your own tags on a trade, so "support bounce", "breakout" and "polarity flip" become labels you can filter and compare. The tag performance view reports trade count, win rate, total and average P&L, and average R-multiple for each tag, so the three sit next to each other on one screen instead of in your memory.
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