A support level is a level where the price tends to find support as it falls. This means that the price is more likely to "bounce" off this level rather than break through it. However, once the price has breached this level, by an amount exceeding some noise, it is likely to continue falling until meeting another support level.[2]
A resistance level is the opposite of a support level. It is where the price tends to find resistance as it rises. Again, this means that the price is more likely to "bounce" off this level rather than break through it. However, once the price has breached this level, by an amount exceeding some noise, it is likely to continue rising until meeting another resistance level.
If a stock price is moving between support and resistance levels, then a basic investment strategy commonly used by traders, is to buy a stock at support and sell at resistance, then short at resistance and cover the short at support[9]
This is an example of support switching roles with resistance,
and vice versa:
If
a stock price is moving between support and resistance levels, then a basic
investment strategy commonly used by traders, is to buy a stock at support and
sell at resistance, then short at resistance and cover the short at support[9] as
per the following example:
When
judging entry and exit investment timing using support or resistance levels, it
is important to choose a chart based on a price interval period that aligns
with your trading strategy timeframe. Short term traders tend to use charts
based on interval periods, such as 1 minute (i.e. the price of the security is
plotted on the chart every 1 minute). Longer term traders typically use price
charts based on hourly, daily, weekly or monthly interval periods. Typically
traders use shorter term interval charts when making a final decisions on when
to invest, such as the following example based on 1 week of historical data
with price plotted every 15 minutes. In this example, the early signs that the
stock was coming out of a downtrend was when it started to form support at
$30.48 and then started to form higher highs and higher lows. This signals a
change from negative to positive trending.[citation
needed]
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