Understanding Support and Resistance in Trading

Support and resistance are the technical equivalent of supply and demand from a technical trading perspective. It is not a law ,or a theory, but rather a pattern that occurs within the course of trading. Support and resistance can make up the general range that the stock trades in. Taking a look at the basics it is useful to define the terms and understand how it is applied in the daily routine of trading.

What is support

Support is the price level, or range, that is at or below the current price in sustaining the level of the stock. In other words it is perceived as a price level that the current price should not go through, in order to sustain the stock's current range. For example, imagine the stock is priced at $110 and the support level is $100, that means the stock must stay at or above $100 for the support level and trading range to remain in tact.

What is resistance

Resistance is a similar concept to support, and yet the opposite side of the trading range. Resistance is the price level, or range, that is at or above the current price. In other words, it is perceived as a ceiling price that the current price would not be able to pierce until that resistance is broken. For example, imagine the same stock priced at $110 and say the resistance barrier price is $150, so long as the stock does not go through $150, the resistance level would still be in tact.

Applications

Granted that support and resistance is such a basic concept, it would be too easy to only conjure up one level for each. That means there are many methods to calculating the support and resistance levels. All in all, there is not one exact price, but rather overlapping prices or ranges that the investor should be aware of in applying the support and resistance levels to the stock in question.

Know that once these barriers are broken, new support and resistance barriers will surface. Also, once support is broken that support level would then become a level of resistance. Conversely, once resistance is broken that resistance level would then become a support level.

Round numbers

The concept of support and resistance basics has been covered and its application but what about how the levels are calculated? Since the concept is just that and not a theory or formulation, it takes market psychology as well as good estimation to become "precise" in knowing where the real support levels, resistance levels, and trading ranges lie. Round numbers are usually common levels for support and resistance. Couple that with other methods, and you will find a solid indicator.

Moving averages

Simple moving averages are the most common method. Using a 50 day and 200 day moving average will help  you finda suspected level of support or resistance. Couple this with the round number concept and you may find that estimating trading ranges is not as difficult as it seems.