Resistance and support lines form the foundation of technical analysis, representing psychological zones where buyers and sellers clash. These levels indicate the highest probability points for price reversals—whether an asset's price will decrease or increase.
Definition of Resistance and Support
Resistance
- A price level where sellers historically overpower buyers multiple times.
- Blocks price increases due to more sellers than buyers, causing bearish reversals.
Support
- A price level where buyers historically overpower sellers multiple times.
- Blocks price decreases due to more buyers than sellers, causing bullish reversals.
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Validation
- Requires at least two price contact points (e.g., highs for resistance, lows for support).
- A third contact confirms the line’s validity.
Types of Resistance and Support Lines
Horizontal
- Highs (resistance) and lows (support) remain at the same level.
Ascending
- Successively higher highs and higher lows (common in uptrends).
Descending
- Successively lower highs and lower lows (common in downtrends).
Key Rules for Trading Support/Resistance
Role Reversal
- Broken resistance becomes support; broken support becomes resistance.
Psychological Levels
- Round numbers (e.g., 5,000 on CAC40) act as barriers without prior tests.
Break Probability Increases with Tests
- After 4+ tests, a break is likely. Rarely reaches a 5th test.
Volume Matters
- High trading volumes at these levels confirm their significance. Breaks need volume backing.
Zones Over Exact Levels
- Account for candlestick wicks—resistance/support is an area, not a single price.
Practical Trading Strategies
- Position Entry: Buy near support; sell near resistance.
- Break Trading: Target next support/resistance after a break.
- Confirmation: Wait for reversal signals (e.g., doji, large candlesticks) before acting.
- Stop-Loss: Place above/below the recent high/low with a margin for spread.
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Factors Affecting Support/Resistance Strength
| Criteria | Impact |
|---|---|
| Timeframe | Longer units = stronger levels (daily > hourly). |
| Chart Patterns | Lines gain value when part of patterns (e.g., triangles, head-and-shoulders). |
| Minor vs. Major | Major levels tested multiple times cause stronger rebounds. |
FAQ Section
Q: Can support/resistance levels fail?
A: Yes—especially if volumes are low or tests are too frequent. Always use confirmations.
Q: How do I draw these lines accurately?
A: Connect at least two major highs/lows, adjusting for wicks. Use logarithmic scales for long-term charts.
Q: Why do psychological levels work?
A: Traders mentally target round numbers, creating self-fulfilling liquidity zones.
Q: Is horizontal support stronger than ascending?
A: Not inherently—strength depends on tests, volume, and timeframe.