Certain price levels, known as support and resistance levels, are more important to the market than others. Support levels indicate large concentrations of buyers willing to purchase at a given price, halting market declines. Resistance levels represent large groups of sellers waiting to sell at a specific price, pausing market rallies. Prior support and resistance levels often retain significance and can reverse roles - with resistance transforming into new support as sellers experience remorse, and support shifting to resistance when buyers feel regret. Identifying these pivotal price points helps traders understand market behavior and find high-probability entry and exit points.
2. Certain price levels are more important than others.
This is the most important fundamental of trading
▪ Sometimes the reason why a particular level is important is obvious
▪ Sometimes the reason for the importance isn’t obvious, but that doesn’t matter
▪ Support is a large concentration of buyers gathered at a price
▪ Resistance is a large concentration of sellers gathered at a price
▪ Levels that were resistance can turn into support levels. Levels that were support
turn into resistance levels. Understanding this is the key to understanding patterns
▪ A particular level may retain its importance for months or even years
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3. Support (Demand) Levels / Zones
▪ Support is a concentration of buyers who are all trying to to pay the same or
close to the same price
▪ At support levels there is more demand than there is supply
▪ Market sell offs pause or halt when they reach support levels
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4. Resistance (Supply) Levels / Zones
▪ Resistance is a concentration of sellers who are all trying to sell at the same
or close to the same price.
▪ At resistance levels there is more supply than there is demand
▪ Market rallies pause or halt when they reach resistance levels
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13. Levels that were previously resistance can turn
into support levels
▪ The traditional reason for this is sellers remorse
▪ Sellers who sold while the stock was at the resistance level believe they made a good
decision after the stock trended lower
▪ But after the stock rallies and trades above the resistance level, many of there sellers
regret their decision to sell
▪ Many of these remorseful sellers decided to buy their stock back
▪ However, they will only do so if they can get it for the same price they sold at
▪ As a result they place their buy orders at their selling price
▪ If there is a sufficient number of these buy orders it will form support
▪ Pattern recognition by computerized trading platforms is probably more of a factor, but
they are based on historical patterns
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18. Levels that were previously support can turn into
resistance levels
▪ The traditional reason for this is buyer's remorse
▪ Investors who bought while the stock was at the support level believe they made a good
decision after the stock trended higher
▪ But after the stock sells off and trades below the prior support level, many of these investors
regret their decision to buy
▪ Many of these remorseful buyers decide to sell their stock
▪ However, they will only do so if they can get it for the same price they bought at. This way they
won’t have a loss
▪ As a result they place their sell orders at their buying price
▪ If there is a sufficient number of these sell orders it will form resistance
▪ Pattern recognition by computerized trading platforms is probably more of a factor, but they are
based on historical patterns
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24. How can this be used?
▪ Don’t place buy orders below support levels
▪ Don’t place sell orders above resistance levels
▪ When markets are trending lower, look for support at important levels.
These are levels that were previously resistance or support. The selloff
may pause or end when it reaches them
▪ The opposite is true too. When markets are in rally mode, look for
resistance at important levels. These are levels that were previously support
or resistance. The rally may end or pause when it reaches them
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25. Summary
▪ At support levels, there is more demand than supply
▪ At resistance levels, there is more supply than demand
▪ Resistance levels can convert into support because of seller’s
remorse
▪ Support levels can convert into resistance because of buyer’s
remorse
▪ Identifying and understanding which levels are important can
lead to profitable investing and trading strategies
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