When traders talk about support and resistance, sometimes they use different terminology then support or resistance. Support can be referred to as floors, lows, bottoms, troughs, or any other word that conveys a low point. Resistance can be referred to as ceilings, highs, tops, peaks, or any other word that conveys a high point.
New traders often consider support/resistance to be somewhat mythical or magical but it is not. As traders, it is our job to recognize opportunities to buy and sell based on what the market is telling us. The market tells us what cheap prices are and what expensive prices are by how the price moves. The market determines prices based on the economic law of supply and demand. If there is a greater demand than supply, prices will rise. If there is a greater supply than demand, prices will drop.
Support levels are price ranges that the market has determined to be cheap. When these levels are reached, demand picks up and supply dwindles causing prices to rise. Our job as traders would be to look for these support levels as buying opportunities. We want to buy at or near support levels, which would represent cheap prices.
Resistance levels are price ranges that the market has determined to be expensive. When these levels are reached, supply picks up and demand dwindles causing prices to drop. Our job would be to recognize these resistance levels as selling opportunities. We want to sell at or near resistance levels, which would represent expensive prices.
The key thing to remember is that the support/resistance levels are ranges not exact prices. The more frequently the price range acts as a support or resistance, the more significant. The other thing to remember is that, the market changes – meaning support and resistance levels will not hold forever. They will be broken. However, until that happens, we look to take advantage of what the market is telling us.
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