What is Support and Resistance in Stocks?

Welcome to Level 5

It’s safe to say you are serious about becoming a knowledgeable investor. Good for you! Now, are you ready to take on a new challenge? Don’t worry, it has nothing to do with chart patterns!

Hint, hint: things will get technical

We’re about to dig deeper into the wonders of technical analysis and we will explore some of the most popular tools used by stock traders out there.

So, grab yourself a beer or make yourself a cuppa and let’s get started!

What is Stocks Support and Resistance?

Support and resistance is one of the most widely used tools amongst stock traders that work to help identify possible points on stock charts where the stock price is likely to change direction.

By studying these two levels, stock traders and investors (and other market participants) can gain a better understanding of what is happening in the stock market. It’s all about price action and those price drops, price breaks and price highs!

A picture, or well a zigzag pattern for us, paints a thousand words so let’s take a look at what Support and Resistance look like.

support and resistance in stocks

Drawing the Support Levels

Support can be spotted at the point on a chart where the stock prices stop falling (or as traders say the price reaches the bottom), change direction, and begin to rise. 

Traders often refer to support as the ‘floor’ as it is the lowest level, the ground that is holding the stock prices from falling beneath it. 

Why are Support Levels Important?

Support levels indicate where there will be a surplus of buyers for the specific stock or share and these usually indicate exit points for many traders.

The selling pressure’s on! At this point, you can expect a higher amount of sell orders. 

Now, of course, the level of support is also important. A strong support level means the chance that the trend will continue is less likely!

support levels

Drawing the Resistance Levels

Resistance can be spotted at the point on a chart where the stock prices stop rising, change direction, and begin to fall. 

Traders often refer to resistance as the ‘ceiling’ that keeps the prices from rising higher. 

Why are Resistance Levels Important?

Resistance levels indicate where there will be a surplus of sellers for the specific stock or share.

Now, of course, the level of resistance is also important. The stronger the resistance, the smaller the chance that the downtrend will continue. 

In other words, to make it even more simple, support levels suggest that the stock prices are unlikely to fall below the line whilst resistance levels suggest that the stock prices are unlikely to rise above the line. 

The buying pressure’s on!

resistance levels

Why Should you Use Support and Resistance?

Identifying Support and Resistance levels is crucial for your trading success. They are not one of the most popular tools amongst traders for no reason (of not only the stock market but other financial markets too). 

In fact, I could write 18 pages, front and back, why Support and Resistance play a major role in technical analysis. 

Now, to make it short and sweet before you’re done with your beer (or a cuppa), let me put it this way. 

By analysing the support and resistance levels, stock traders can more accurately predict future market movements.

Armed with this information, traders and investors are able to potentially find price levels (or price points) to enter a position, or close a position.

Pretty awesome, right?

How to Draw Support and Resistance Levels?

Okay, so now that you know what Support and Resistance levels are, let’s take a look at how you can identify them on price charts. 

And to make it fun, I want you to open up your MT4 (or other charting platforms)  and follow the steps as we go. 

Ready?

Here are the three steps on how to draw Support and Resistance levels in MetaTrader 4 (MT4) with additional important tips.

1. Open up your favourite chart type!

Candlesticks, Bar Chart, or Line Chart – it’s completely up to you. Support and Resistance work with all. In our case, we will be using a Candlestick Chart.

2. Draw a simple line at all top and low price points you can spot

By drawing these lines, you will be able to clearly see whether the market is in a trend or not. Your chart should look like this:

(To draw a horizontal line on your chart, select the horizontal line button on your Toolbar and click anywhere on the chart where you want the line to appear).

3. Link the highs and lows you identified with horizontal lines

Those lines will become your main support and resistance zones. Your chart should look similar to our example below.

Now, there is a very low chance that the lines you drew will lie exactly on the highs and lows you identified and that is absolutely fine.

And that’s it! Once you’ve completed these three steps, you can be confident that the lines represent clear support and resistance zones. There is always the option to adjust your lines, but it shouldn’t be necessary.

And the best part?

This method works great on any time frame, for any stock chart type.

Pretty awesome, right?

IMPORTANT: Make sure that the zones you identify are connecting at least two highs or lows. The more, the better.

The Lines Don’t Lie. Or Do They?

Throughout your journey as a stock trader, you will often come across Support or Resistance levels that appear broken, but soon after you’ll find out that the market was just testing it. So how can you really know if the support and resistance are real? 

Truth be told, there is no definite answer to that question. 

However, to help you filter out these false breakouts, the trick is to think of Support and Resistance more as “zones” rather than concrete numbers.

One way recommended by stock experts that helps investors find these zones is to plot support lines and resistance lines on a line chart rather than using a candlestick chart.

support and resistance areas

The reason is that line charts only show you the closing price of an underlying asset while candlesticks add extreme highs and lows to the picture which can be distracting.

Summarising Support and Resistance in Stocks

The concept of support and resistance areas (or levels) acts as a foundation for many advanced trading strategies in the stock market. 

Now, at the end of the day, there are a variety of ways technical traders can use these levels in their trading strategies. But at the end of the day, it is completely up to you to choose how and when you’ll use Support and Resistance. 

Just promise us one thing, you will always use it when performing technical analysis. 

Deal?