Identifying Support and Resistance Levels on a chart is fundamentally linked to drawing trend lines.
As we have seen in our examination of trend lines, a trend line is drawn to connect sequential highs or lows in the price movement of an asset to determine the direction in which the market is moving.
To explain what support and resistance levels are, let us consider the chart below:
You will have noticed that we have added two distinct trend lines on this chart, which engulf the price movements of our asset. It seems, then, that our asset’s price is unable to fall below a certain threshold or move higher than a certain level. Indeed, these two levels are tested again and again, yet our asset’s price remains contained within the two lines.
These two lines, beyond which an asset’s price is unwilling to move, are known as the Support Level and the Resistance Level.
- Support Level: A certain price level (but not an exact number), beyond which an asset’s price is reluctant to fall, and
- Resistance Level: A certain price level (but not an exact number), that an asset’s price is reluctant to move beyond.