Support and resistance

Support and resistance are price levels on a chart where a stock has historically tended to stop falling or stop rising, reflecting zones where buying or selling pressure has repeatedly overwhelmed the opposing side. Support is a level below the current price where demand has previously stepped in to halt a decline, while resistance is a level above the current price where supply has previously stepped in to halt an advance.

These levels form because market participants remember prior price points and tend to act on them again. A stock that bounced off a certain price several times in the past attracts buyers willing to step in near that same level again, reinforcing it as support, while a level that has repeatedly capped rallies attracts sellers willing to take profits or short near that same price again, reinforcing it as resistance. Round numbers, prior highs and lows, and levels tied to a stock's own trading history are especially common sources of support and resistance.

An important feature of these levels is that they can switch roles once broken. If a stock decisively breaks below a support level, that same price often becomes resistance going forward, since investors who bought there and are now underwater tend to sell to break even if the price climbs back to it, and the reverse holds true when resistance is broken to the upside. Traders use support and resistance to plan entries, set stop losses, and gauge the significance of a breakout or breakdown, since a move through a well-established level is generally considered more meaningful than a move through an area with no prior trading history.