Support and resistance

What a level is and why it exists

Look at almost any chart and you will see price stopping and turning at certain prices again and again.

• Support — a zone below the current price where buying has been strong enough to stop declines.
• Resistance — a zone above where selling has been strong enough to stop rallies.

Levels are not magic; they come from people and their orders:

1. Memory and regret. Someone who bought at $50 and watched it fall to $45 promises themselves: "If it gets back to $50, I'll get out even." When it does, they sell — and $50 becomes resistance. Those who missed the bounce from $45 say "if it comes back there, I'll buy" — and $45 becomes support.
2. Orders cluster. Limit buy orders, stop-losses and take-profit orders accumulate at obvious prices: previous highs and lows, round numbers.
3. Big participants. A fund building a large position spreads its buying over days around a price it considers fair; that buying defends the zone.
4. Self-fulfilment. Because many people watch the same levels, a reaction there becomes more likely.

How to find levels, step by step

1. Start with the daily chart (and glance at the weekly for the bigger picture). Levels visible on higher timeframes are watched by more participants.
2. Find the highs and lows where price clearly turned. In the chart above, price turned down near $109–$110 three times (highs $109.74, $109.85, $109.76) and turned up near $100–$101 twice (lows $99.99 and $100.22).
3. Count the touches. Two touches make a level; three or more make an important one. But every test also uses up some of the orders waiting there — a level hit five times in a row is often about to break.
4. Draw through the cluster, not through one stray wick. Use the area where most bodies and wicks bunch up.
5. Prefer recent levels. A level from last month matters more than one from five years ago.
6. Keep only a few. Two or three levels above and below the price are enough. A chart covered in lines tells you nothing.

Zones, not lines

Here price tests the $50 area four times. The highs are $50.30, $49.80, $50.40 and $50.10. If you drew an exact line at $50.00, it was "broken" three times and missed once — you would conclude the level is useless. Draw a zone from $49.60 to $50.40 instead, and all four reactions fit. A practical way to size the zone: the band that contains the wicks of the touches — on the daily chart of a large stock, typically from a few tenths of a percent up to about 1% of the price.

Round numbers

$50, $100, $250, $1,000 — round numbers act as levels because people think in them: limit orders, targets and stops cluster there. Notice that the touches above slightly overshoot or fall short of $50. Orders around a round number are often placed a little before it, so price reacts to a zone around the number, not to the number itself.