Support and resistance levels are technical analysis tools used to identify key levels at which the price of an asset is expected to either stop declining and reverse its direction (support) or stop rising and reverse its direction (resistance).
Support level: A support level is a price level at which enough buying interest is expected to emerge to prevent the price from falling further. It is considered a floor for the price as it is expected to provide support to the asset's downward movement. Traders and investors often identify support levels as potential buying opportunities, as they may indicate good entry points for long positions. When the price approaches the support level, buyers tend to step in, increasing demand and potentially driving the price back up.
Resistance level: A resistance level, on the other hand, is a price level at which enough selling pressure is expected to emerge to prevent the price from rising further. It is considered a ceiling for the price as it is expected to resist the asset's upward movement. Traders and investors usually identify resistance levels as potential selling opportunities, as they may indicate good exit points for long positions or entry points for short positions. When the price approaches the resistance level, sellers tend to enter the market, increasing supply and potentially pushing the price back down.
Support and resistance levels are typically identified by looking at historical price charts and identifying recurring patterns where the price has reversed its direction in the past. These levels are considered important because they represent zones where market participants have shown interest in buying or selling the asset in the past. As a result, they can influence future price behavior as traders often anticipate that the price will react to these levels again.
It is important to note that support and resistance levels are not exact prices but rather zones. While the price may approach these levels, it does not always need to reach them precisely. Additionally, support and resistance levels can change over time as market dynamics shift. Therefore, it is crucial for traders and investors to continuously monitor these levels and observe how they are respected or violated to make informed trading decisions.