DEFINITION of a Resistance level
A resistance level is a point on a price chart at which a rising price direction is obstructed by an overwhelming inclination to sell the asset.
WHAT IT IS IN ESSENCE
If a market price is approaching this level, a trader may opt to close position and take the profit, instead to wait and risk the price falling back.
The meaning of resistance level derives from market attitude and trader actions. Because it is an indication if an asset has reached a price level that market contributors are unwilling to exceed.
In other words, there is resistance to the market.
Resistance levels are a key tool in technical analysis, and partner with support levels. Support levels are the point at which traders are unwilling to let an asset’s price drop much lower.
Traders often identify areas of support and resistance in order to make decisions on trades, including the positioning of stops and limits. The supply created at these levels can effectively become a fulfilling prediction around price points.
The quick increase in demand, also the decrease in supply, will cause a spike in the price known as a ‘break out’.
HOW TO USE
If an asset breaks its resistance level, then some traders believe it will carry on rising in price, or ‘rally’. Until a new resistance level is found.
It is common for the resistance level to become the new support level at this point.
Technical traders hope to identify both the resistance level of a stock and the support level. So that they can time their buying and selling of a stock to capitalize on the price reversal that will occur after these levels have been reached.
To use support and resistance effectively you first need to understand how asset prices typically move. So you can then interpret support and resistance from that framework.
Support is where the price tends to stop falling. Hence, resistance is where the price tends to stop rising. Yet, trying to make trading decisions based on this vague definition will likely lead to a depleted trading account.