Support and resistance represents key levels where supply and demand meet. Support and resistance suggests that the price of a security will tend to stop and reverse at certain predetermined price levels. The financial markets are driven by supply and demand, whereas increased supply drives down price, and increased demand drives up price. When supply increases (selling increases), it is said to be a bearish signal. When demand increases (buying increases), it is said to be a bullish signal. When supply and demand are equal, prices move sideways as bulls and bears fight to establish a new trend.

What Is Support?

Support is the price level which, historically, a stock has had difficulty falling below. It is typicaly a level at which a lot of buyers enter a stock. This is the level at which demand is strong enough to prevent price from continuing to decline. As price declines toward support, buyers become more inclined to buy and sellers become less inclined to sell. The stock will bounce off of support when demand outweighs supply.

Support levels are typically below the price a stock is currently trading at. However, it is not uncommon for a stock to trade at or near support. In addition, price movements can be volatile and dip below support. A brief deviation below support does not neccesarily mean it has been broken.

What Is Resistance?

A resistance level is the opposite of a support level. It is the upper level at which a stock can trade, but not exceed, in a select period of time. Resistance is the level at which selling is strong enough to prevent the further increase in price. As price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy.When supply overcomes demand the price will retreat from the resistance level.

Support and resistance levels can be identified by establishing trend lines. In addition, some traders believe in using pivot point calculations. The more often a support or resistance level is tested, the more significance given to that specific level.

Unfortunately, support levels do not always hold. As sentiment changes, sellers may be willing to sell at lower levels. If a bearish trend breaks support, it will fall until buying increases and a new support level is established. If a price breaks past a support level, that support level often becomes a new resistance level. The opposite is true as well, if price breaks a resistance level, it will often find support at that level in the future.

Support and resistance tranding, also known as range trading or channel trading, is a basic invcestment strategy that is commonly used by traders. In short, a trader will buy a stock at support and sell at resistance. Conversely, the trader will short at resistance and cover at support.

When determining entry and exit strategy using support and resistance, it is important to use a chart based on the appropiate price interval perdiod for you particular investment strategy.

Short term traders tend to use charts based on smaller interval periods, such as 1 minute, while long term traders using price charts based on hourly, daily, weekly or monthly interval periods. Typically traders use short term interval charts when making a final decisions on when to invest.