Resistance, or a resistance level, is the price at which the price of an asset meets pressure on its way up by the emergence of a growing number of sellers who wish to sell at that price. Resistance levels can be short-lived if new information comes to light that changes the overall market’s attitude toward the asset, or they can be long-lasting. In terms of technical analysis, the simple resistance level can be charted by drawing a line along the highest highs for the time period being considered. Resistance can be contrasted with support.
Depending on price action, this line can be flat or slanted. There are, however, more advanced ways to identify resistance incorporating bands, trendlines, and moving averages.
What Do Resistance Levels Tell 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 that assumes the vast majority of available information about a stock, bond, commodity, or currency is almost instantaneously incorporated in the price by market forces. Therefore, according to this theory, it isn’t profitable to make investment decisions based on this information. Instead, technical traders try to divine how stocks will move on a short-term basis by looking at the behavior of markets in similar, past situations.
Technical traders identify both the resistance and support level so that they can time their buying and selling of a stock 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 trade trigger. The simple resistance level has to be redrawn as new price data comes but most platforms offer visualizations of resistance that can be dynamically calculated. Moreover, many technical indicators become proxies for resistance at different points of price action. For example, a simple moving average can be used as a visualization of resistance when the price action is below the line as in a downtrend.
The Difference Between Resistance Level and Support Level
Support and resistance are complementary concepts. Resistance establishes the current price ceiling for the stock, commodity, or currency, and support forms the floor. When the price action breaches either support or resistance, it is considered to be a trading opportunity.
Limitations of Using Resistance
Resistance is more of a market concept than a true technical indicator. As mentioned, there are far finer technical analysis tools that incorporate the concept of resistance while being far more dynamic and informative than drawing a resistance line across recent highs. These include trendlines, price-by-volume (PBV) charts, and the whole swath of moving averages that can be tweaked by time periods to offer a spectrum for resistance levels.