Support And Resistance

Support & Resistance

Support is a price at which a financial security finds a base. From this base, the price of the financial security may go up.

Resistance on the other hand is a price at which a financial security finds a ceiling. From there, the price of the financial security may move downwards.

Source: Yahoo Finance

The general idea is to buy near the support as the price moves up and sell near the resistance when the price of the security encounters difficulty is moving up further.

Some traders allow the security’s price to test resistance level before selling. If the resistance is broken, the trader may allow the security to run higher, thereby earning more profits.

Some traders initiate a short position at or around the resistance with the intention to buy it back at support. Option traders can use buy put options instead of dealing directly with the security concerned. Or he could initiate a bearish position on the underlying security. The trader may allow the security’s price to test support. If support is broken, the trader may continue to let his profits increase.

If support is broken, the security’s price can continue downwards. If resistance is broken, the security’s price can continue to move upwards.