Stock Support And Resistance Levels Explained

A support level is a price of a specific stock, to which the stock dropped more than once. For example, Let’s suppose Amazon stock dropped to $100, then grew to $120, then dropped to $100 again, and then grew again. $100 would be named as the support level of Amazon stock price since it has not gone below this price twice when it had the chance.

On the other hand, a resistance level is a price that the stock has not gone above yet. Let’s take Amazon as an example again. Let’s imagine that it hit $120, then dropped to $100 and then grew again to $120, then dropped again. $120 would be named the resistance level as the stock can not grow any higher than this when it had 2 chances already. Whenever a price goes below a support level, or above a resistance level, we call it a breakout in a stock market.

A lot of traders use this support and resistance in stock trading in order to determine good buy and sell positions. For example, the support level is a good buy position, while the resistance level is a good sell position. In this article, we will further analyze these concepts and find out how they work while trading in the stock market.

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Stock Support And Resistance Explained - With Examples


 
The price of a stock seldom goes in a straight line; instead, it varies up and down over time. However, when it repeatedly reaches a certain value then reverses direction, it creates price levels called support and resistance. These levels are just one tool in technical analysis that you can use to gain more skills as well as knowledge while trading in the stock market.

To explain simply support and resistance indicators in the stock market, it should be noted that they are price levels that act as boundaries that a stock has bounced off more than once. Support is the level a stock tends to stay above. On the other hand, resistance is the level a stock hits and comes back from.

Let’s take a look at the real-life example in order to better understand what support and resistance levels mean in the stock market. Let’s say we are trading with the stocks of Apple. If we take a look at the last 5 day data, we can immediately identify support and resistance levels. At the time of writing this guide, the resistance level for Apple sits at $128, because it failed to break through that price twice on May 14th.

On the other hand, in terms of support levels we can see that the price tried to drop below $125.25 on 3 separate occasions, but could not. This means that the support level for Apple is currently at $125.55. With this information, a trader can determine where the best entry and exit points are for Apple in the short term. Traders should remember that this is a 5-day chart meaning that it’s not designed for the long term.

A lot of traders will see $125 as the perfect entry point for their positions in the short term, and also see $128 as the perfect exit point unless they are willing to risk waiting for a breakout.

While having stock support and resistance explained it should also be mentioned that Support and resistance levels are not necessarily good tools for long-term trades simply because there is more time for something to happen with the company which has nothing to do with the technicality of the chart, but due to something external affecting its stock price. This is when the “logic” of support and resistance kind of breaks down.
 

Stock Market Support and Resistance Risks

 

While talking about stock support and resistance levels it should be noted that these indicators are not 100% guaranteed and have some risks associated with them which should be taken into account by every trader. So some of the risks related to these levels include psychological indicators and outside factors. We will talk about them briefly down below.
 

Psychological Indicators

The first important factor that should be mentioned here is psychological indicators. If the chart does not necessarily showcase very clear support and resistance levels, then traders start to psychologically determine the ones that are the most appropriate for best. They tend to round these levels almost all the time. For example, we also did the same with Apple’s resistance level in the example above. We rounded from $127.8 to $128 to make it easier to see or easier to plan for.
A lot of traders do this as well because they do not think the remaining $0.2 bears any significance. In the case of “expensive” stocks like Apple, yes they truly do not bear much significance, on the other hand, when we are talking about cheaper stocks or even penny stocks, they are very important to be taken into consideration. All of this means that the first risk related to stock support and resistance indicator is when traders think they know where these levels are when in fact, they are totally wrong.
 

Outside Factors

We already noted earlier that support and resistance are usually used for short-term trades. Maybe a maximum of 5 days at best. Anything more than this, for example for a 1-month chart, support and resistance becomes much less reliable. Why? Because then there is much more time for something external to affect the stock price.
For example, Apple just launched a new iPhone, while you were still looking at support and resistance levels. Naturally, the “logic” of these indicators is going to break down as something that important will definitely affect the stock price. This is why it is extremely important for the traders to be alerted about the essential events or the economic news releases because it always affects the market performance a great deal. While these types of outside factors occur in the stock market, it usually causes the level of volatility to grow significantly which, on the other hand, causes the prices of various stocks to change.

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Stock Trading Support and Resistance - Key Takeaways

A support level is a price a stock didn’t go below more than once, and the resistance is the price it couldn’t go above more than once.
When the price of a stock goes back to a prior low, investors may be more interested in buying because they are seeking a good deal in the hopes of buying low and selling high.

Support and resistance levels are not 100 percent guaranteed and come with certain risks that might include psychological and outside factors.
If the chart does not display extremely obvious support and resistance levels, traders begin to psychologically assess which ones are most ideal for best. This sometimes leads to big failures.
 

FAQ on Support and Resistance Indicators for Stocks

What is the support or resistance of a stock?

A support price of a stock is a low point which it has reached more than once before. It is used by bulls as an entry point for buying.
The resistance price of a stock is the opposite, a high point which it has reached, but wasn’t able to breach more than once in the past. It’s used by bears as an exit point for selling.
 

How do you find the resistance and support of a stock?

A stock’s support level is the price it dropped to more than once in the past but didn’t go any lower. The resistance is the opposite, a price which it grew to more than once, but couldn’t get past. For example, If Amazon stock dropped to $50, then grew to $100, then fell to $50 again, and then grew again to $100. This would mean that $50 is the support level of Amazon’s stock price in this given scenario. The resistance would be $100 because it couldn’t go above that price.
 

Which time frame is best for support and resistance in the stock market?

The best time frame for support and resistance is between one hour and twenty-four hours. However, some traders also use support and resistance indicators in the one-week time frame. On the other hand, it is not recommended to do because the latter contains a lot of risks.
 
Support and resistance levels do not work in the long run because there are several outside factors (such as important news releases and other important events) that might affect the stock market in the long run. This suggests that those variables are very likely to have a big impact on overall market performance. Therefore, the best time frame for support and resistance in the stock market is between one hour and twenty-four hours.
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