A resistance level, in the context of technical analysis in trading, refers to a price point or range that a security rarely surpasses due to pressure from selling activities. It represents the upper boundary of a price channel in which a security trades. When the price of a security approaches the resistance level, it is typically seen as a signal that the security is getting overpriced. This prompts traders to sell, limiting upward movement and potentially reversing the price trend.
1. What happens when a security price goes above the resistance level?
When a security’s price moves above its established resistance level, it’s often seen as a bullish sign. This breakout indicates the price may continue to rise until it establishes a new resistance level. However, it isn’t uncommon for the price to fall back down again, effectively retesting the old resistance level which has now become new support.
2. How is a resistance level determined?
Want More Financial Tips?
Resistance levels are determined by analyzing a security’s historical price data. Analysts map out the price highs the security reached before its price subsequently fell, indicating selling pressure. If these price highs cluster around the same level, that price level becomes the resistance.
3. How many times can a resistance level be tested?
A resistance level can be tested multiple times, however, as the number of tests increase without a breakout, the resistance level becomes stronger. This means that greater buying pressure is necessary for the price to break through the resistance level.
4. What is the difference between support and resistance in trading?
In trading, support refers to a price level where a security finds significant buying interest which prevents the price from falling further. In contrast, resistance is a price level where a security finds significant selling interest which prevents the price from rising further. Essentially, support is the lower boundary and resistance is the upper boundary of a price channel.
5. How do traders use resistance levels?
Traders use resistance levels to inform their trading decisions. A resistance level can indicate a potential selling opportunity once the price reaches it, because it’s likely the price will pull back afterwards. Conversely, if the price breaks above the resistance level, it might be considered a good time to buy as it suggests the price will continue to climb.