In technical analysis, support and resistance are key concepts used to identify levels at which the price of a stock or other financial asset is expected to encounter barriers in its movement. They help traders and analysts make decisions about buying, selling, or holding positions.
Support: Support is a price level at which the demand for a stock or asset is believed to be strong enough to prevent or limit further price declines. It acts as a floor or a bottom that supports the price and prevents it from falling further. When the price reaches a support level, it is expected to "bounce" or reverse its downward movement. Support levels are often identified by connecting a series of lows on a price chart. Traders may use support levels to set buy orders or to place stop-loss orders below them to limit potential losses.
Resistance: Resistance is a price level at which the supply of a stock or asset is believed to be strong enough to prevent or limit further price increases. It acts as a ceiling or a top that resists the price from rising further. When the price reaches a resistance level, it is expected to "pull back" or reverse its upward movement. Resistance levels are often identified by connecting a series of highs on a price chart. Traders may use resistance levels to set sell orders or to place stop-loss orders above them to protect profits.
Support and resistance levels can be determined using various technical analysis tools, such as trend lines, moving averages, Fibonacci retracements, or pivot points. They are considered important psychological levels, as they represent areas where traders are more likely to take action, resulting in increased buying or selling pressure.
It's important to note that support and resistance levels are not precise and can be subject to temporary breaches or false breakouts. Traders typically use additional indicators or confirmation signals to strengthen their analysis and decision-making.
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