A Simple Explanation of Support And Resistance Levels

One of the most difficult concepts for beginning traders and some professionals alike is the understanding of simple support and resistance levels. As such, we decided to provide this very simple explanation of support and resistance levels to help you “get over the hump.”

Support and Resistance Are Invisible on Charts

So much of our time and effort are spent trying to use technical analysis determine where support and resistance levels are in the market so that we can make money off of these areas. Many different tools have been used, including moving averages, trend lines, candlesticks, and retracement levels. However great these tools are, they still don’t help us explain what support and resistance are. The reason it’s so hard is because Support and Resistance levels are invisible on charts without these great tools.

Can you find the areas of support and resistance on this chart?

Did you have the same levels that we have identified below? (now we went a little crazy with different levels but I’m sure you have drawn some lines completely different and that’s the point).

You see, most efforts to use Support and Resistance Levels fall short because they attempt to use a single tool and a single time-frame for analysis. The best results however come when a comprehensive theory of market action is employed that can help the trader understand not WHERE support and resistance are, but WHY they happen. This type of thinking will surely be more beneficial in the long run for you.

Here Are The Simple Definitions…

Support is something below price, and it is a force that when encountered pushes price back up into the range from where it came. It consists of buyers who are present in the market but waiting to take action until price reaches a certain level, or of short position holders who may be forced to buy if the market runs against them. It is this bunching of buyers around a certain price that causes support to act like support.

Resistance is something above price, and it is a force that when encountered pushes price back down into the range from where it came. It consists of sellers who are present in the market but waiting to take action until price reaches a certain level, or of long position holders who may be forced to sell if the market runs against them. It is this bunching of buyers around a certain price that causes resistance to act like resistance.