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Support and resistance are price levels that the price keeps bouncing off for an extended period of time.
A support level is formed when the price stops falling after a prolonged decline and starts moving up again. This is because lower prices attract buyers who once again become active participants in the market and drive the prices back up.
In contrast, a resistance level is formed when the price begins to fall after a period of upward movement, as those who bought the asset earlier start selling it in hopes of making a profit. This creates resistance and prevents the price from climbing higher.
Note that for the price levels to be considered support and resistance, they should be tested by traders multiple times within a certain period.
As the price moves on, support and resistance levels can stay in the same place or change. Because of this, there are three main types of support and resistance levels.
Some support and resistance zones are fixed. This means that no matter how long the price is moving, it will bounce off these levels without change (but it can breach them). Fixed support and resistance are generally the product of traders’ psychology.
Traders often rely on historical data to show how the market behaved in the past, which is why many traders expect the support and resistance levels of the past to apply even to the current market situation. Whether these levels hold up through the decades or not, traders still use them, which keeps support and resistance fixed.
Other common fixed support and resistance levels can be found at round levels like 10.30 or 4.00 because it is psychologically more reasonable for traders to place their trading orders at round numbers.
Dynamic support and resistance levels change with time and often adjust to recent price changes. These levels are formed when traders base their judgment solely on the current movement of the market. They analyze the price charts to spot new developments in supply and demand. If they deem the recent price move impactful, they will alter their plan and decide on a new support and resistance level.
Semi-dynamic support and resistance levels are something in between dynamic and fixed levels. Like dynamic levels, semi-dynamic support and resistance change along with the price. However, they change at a fixed rate instead of shifting to accommodate new market developments. This means the line drawn through the support or resistance levels will be straight yet directed upwards or downwards.
Support and resistance indicators can help traders identify potential support and resistance levels, which is crucial to know to plan their next trades successfully. Here are the best support and resistance indicators.
The Fibonacci indicator is used to identify semi-dynamic support and resistance levels. This tool is based on the Fibonacci ratios—percentages of a specific price range that can help traders identify potential support and resistance levels. These ratios come from the well-known Fibonacci numbers, which represent a numerical sequence with each following number being the sum of the previous two. Dividing the numbers in a particular order will give you potential percentages for support and resistance levels: 61.8%, 38.2%, 23.6%, and 50%.
This indicator mainly looks for potential corrections against the main trend. Using the Fibonacci ratios on a specific price range can show possible support and resistance levels where the price is more likely to retrace its steps. This can help traders detect potential entry and exit points and prepare to take action if necessary.
While far from a traditional indicator, Wolfe waves can provide traders an insight into support and resistance levels.
Wolfe waves are a pattern formed when the price trades within a range. The higher highs and lower lows of the range move up or down along with the price, creating straight parallel lines. These lines, in turn, act as support and resistance levels.
Since a Wolfe wave is a pattern at its core, it typically occurs before a reversal of the trend. As a rule, on the fifth swing of the pattern, the price breaks through the support or resistance level and then reverses and continues to move in this direction. Identifying this pattern can help traders find potential entry or exit points.
The pivot point indicator helps traders identify potential entry and exit points by plotting lines through pivot points where the market is most likely to change the direction of its movement. To calculate pivot points, the indicator uses the average high and low as well as the closing price of the previous day.
The lines plotted on the chart show potential support and resistance levels. This allows traders to prepare to exit or enter a trade in advance. However, if the price doesn’t bounce off one of the levels, the trend is currently strong, so traders also learn the direction of the trend.
The Camarilla pivot point indicator is based on the theory that the price tends to revert to its mean for a limited time. The Camarilla pivot point indicator can identify potential intraday support and resistance levels by using the average high, low, and closing prices of the previous trading day and the Fibonacci numbers. As a result, the indicator marks eight levels that may act as support and resistance to the current trend.
Traders can plan their trades around these eight levels. Bulls may put buy orders around support levels, while bears focus on trading around the resistance levels.
The Murrey math lines (MML) indicator consists of nine lines (including zero level) plotted on the chart that act as support and resistance levels. These lines are calculated using formulas introduced by T. Henning Murrey, which were based on W. D. Gann’s theory that the price has a tendency to backtrack at 1/8 intervals. That’s why the MML indicator includes eight price levels.
While the MMLs can reveal potential support and reversal levels, they can tell traders much more about the strength of price movements. The strongest support and resistance MMLs are the bottom, middle, and top lines (0/8, 4/8, and 8/8, respectively), where the price is most likely to bounce off and retrace. The range between 3/8 and 5/8 lines is considered a standard trading range, while 2/8 and 6/8 act as strong pivot points and generally indicate that an asset has been oversold or overbought.
The price rarely moves in a straight line. It rises when it meets support from buyers and falls when it encounters resistance from sellers. As you can see on the chart, this back-and-forth can go on for a while as both sides want to capitalize on new market developments.
However, after a while, one of the sides loses interest in the “battle” and allows the other side to win. When this happens, the price will breach a support or resistance level and continue moving beyond the previously rigid range, which you can observe in the chart above.
Note that when the resistance level is breached, it no longer acts as one because the price is already above it. Instead, it transforms into a new support level, from which the price bounces off as the trend moves forward.