What The Heck Is Support And Resistance For Stock Traders And How Can I Use It?

support and resistance
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We hear it all the time right? Support and resistance...but what the heck is Support and Resistance for stock and options traders? And really why should we care about it after all? Well, you should care and here's the skinny on this simple but powerful technical analysis tool.

What is Resistance?

Resistance refers to the price at which a stock trades, but not exceed past, for a period of time. The stock stops rising and does not break resistance because sellers start to outnumber buyers. Notice that I said it stops trading for a "period of time" and not that "it does a U-turn". Most people assume that resistance is where the stock does a u-turn and heads lower...short term. They are wrong. TRUE resistance is where the stock continue to to try to push beyond but continues to fail each and every time.

In other words, this resistance price level occurs when selling is sufficient enough to disrupt or reverse an uptrend. It is represented on a chart by a horizontal line that connects several tops, signifying that sellers are overpowering buyers. Resistance is also regarded as a ceiling because its price level prevents the prices from moving up and past it.

When the price reaches the resistance level, supply is believed to be stronger than the demand, which means that it is preventing the price from rising above the resistance. However, resistance does not always hold and when it breaks, it signals that the bulls have beaten the bears in that fight, creating new highs.

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What is Support?

The support price level occurs when buying is sufficient enough to disrupt or reverse a downtrend. Just like the resistance description above, support is NOT the area where the stock bounces quickly. Rather, its the area on a chart where the stock continues to find strength and resists falling below. It is represented on a chart by a horizontal line that connects several bottoms, signifying that buyers are overpowering sellers. Support is also regarded as a floor because its price level prevents the prices from falling below it.

When the price reaches the support level, demand is believed to be stronger than the supply, which means that it is preventing the price from falling below the support. However, support does not always hold and when it breaks, it signals that the bears have beaten the bulls in that fight, creating new lows.

What makes Support and Resistance levels Strong?

The strength of support and resistance is important for stock and options traders because it can give you clues to whether a trend or pattern breakout will continue or if it is going to reverse. Generally speaking, support and resistance levels can be strong for the following reasons:

  1. Length of Time - the longer back in time the support/resistance level holds the more significant it came become going forward.
  2. Volume - Breakouts past or below strong support/resistance levels signal that the level needed additional buyer/seller to get it over the hump. Mark these going forward.
  3. Recent Levels - The more recent a support/resistance level is the more significant it can be. But remember, these can only help during short intra-day time periods and do not work well over weeks and months.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.