In today’s article, we will consider such a concept as the level of resistance in trading. You will learn what a resistance level is, what its essence is and what it says, we will give examples of using a resistance level and the difference between a resistance level and a support level. Read about all this further in the article.
What is resistance (resistance level)?
Resistance or resistance level is the price at which the price of an asset is facing upward pressure due to the emergence of a growing number of sellers willing to sell at that price. Resistance levels can be short-term if new information emerges that changes the general attitude of the market towards the asset, or they can be long-term . In terms of technical analysis , a simple resistance level can be depicted by drawing a line along the highest highs of the time period under consideration. Resistance can be opposed to support .
Depending on the price behavior, this line can be flat or sloping. However, there are more advanced ways to identify resistance, including bands, trendlines , and moving averages.
What are the resistance levels telling you?
Resistance levels and support levels are two of the most important concepts in the technical analysis of stock prices . Technical analysis is a method of analyzing stocks , which assumes that the vast majority of available information about stocks , bonds , commodities, or currencies is almost instantly incorporated into the price by market forces. Therefore, according to this theory, it is unprofitable to make investment decisions based on this information. Instead, technical traders try to guess how stocks will move in the short term by looking at the behavior of the markets in similar situations in the past.
Technical traders identify both a resistance level and a support level so that they can time buying and selling stocks in order to capitalize on any breakouts or trend reversals . In addition to identifying entry and exit points, resistance can be used as a risk management tool. Traders can set stop loss orders to follow the resistance level or use any breach as a trigger to trade. A simple resistance level needs to be redrawn as new price data comes in, but most platforms offer a resistance visualization that can be calculated dynamically. Moreover, many technical indicatorsbecome substitutes for resistance at different points in the price movement. For example, a simple moving average can be used as a resistance visualization when the price is below the line, as in a downtrend .
An example of using a resistance level
Let’s say you’re looking at the stock price history of the Monday Tuesday Company with the ticker MTC and want to determine when it would make the most sense to sell the company short. Over the past twelve months , the stock has traded between $7 and $15 per share. During the second month of the period in which you study MTS, the stock rises to $15, but by the fourth month it drops to $7. By the seventh month it rises again to $15 and then drops to $10 in the ninth month. By month 11, it rises again to $15, and over the next 30 days drops to $13, and then rises again to $15.
At this point, you have clearly set the $15 resistance level. If you see no reason for the stock to break the band it has been trading in for the past year, this would be a good time to short the stock because the market has clearly shown that once MTC stock hits $15, the vast majority of supply enters the market to stop its further growth. However, one should be careful, as sometimes resistance levels break and are left behind if the fundamental drivers of a stock, such as an economic boom or a new efficiency in a company’s business model, are overwhelmed by technical forces.
The difference between a resistance level and a support level
Support and resistance are complementary concepts. Resistance sets a ceiling for the current price of a stock, commodity, or currency, while support forms a floor. When price action breaks through support or resistance, it is considered a trading opportunity.
Restrictions on the use of resistance
Resistance is more of a market concept than a true technical indicator . As mentioned, there are far more subtle technical analysis tools that incorporate the concept of resistance, being much more dynamic and informative than drawing a resistance line through recent highs. These include trendlines , price-by-volume (PBV) charts, and a range of moving averages that can be adjusted over time periods to offer a range of resistance levels.
- The resistance level represents the price point that the asset cannot exceed in the considered time period.
- Resistance can be visualized using various technical indicators , rather than simply drawing a line connecting the highs.
- Applying trendlines to a chart can provide a more dynamic view of resistance.
And that’s all about the level of resistance today . I hope the article was useful to you. Share the article on social networks and instant messengers and bookmark the site. Good luck and see you on the pages of the techyadjectives project !