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As demand increases, prices increase and as supply increases, prices decline. Supports and resistances represent key levels where the forces of supply and demand meet.[1]
Support[edit]
A support level is a price level which act as a floor by preventing the price of an asset from being pushed downward.[2] This means the price is more likely to "bounce" off this level rather than break through it. However, once the price has passed this level, by an amount exceeding noise, it is likely to continue dropping until it finds another support level. Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support.
Resistance[edit]
A resistance level is the opposite of a support level, resistance levels are also regarded as a ceiling because these price levels prevent the market from moving prices upward.[2] This means the price is more likely to "bounce" off this level rather than break through it. However, once the price has passed this level, by an amount exceeding noise, it is likely that it will continue rising until it finds another resistance level.
See also[edit]
References[edit]
- Murphy, John (1999). Technical Analysis of the Financial Markets. New York: New York Institute of Finance. ISBN 978-0735200661.