Support and resistance are key concepts in technical analysis that refer to levels at which the price of a stock or other financial instrument is likely to experience difficulty moving past.
Support refers to a level at which demand for a stock is thought to be strong enough to prevent the price from falling further. This level can be identified by looking at previous price lows or a trend line connecting multiple lows. Once the price reaches this level, traders may buy the stock, which can prevent the price from falling further.
Resistance, on the other hand, refers to a level at which supply of a stock is thought to be strong enough to prevent the price from rising further. This level can be identified by looking at previous price highs or a trend line connecting multiple highs. Once the price reaches this level, traders may sell the stock, which can prevent the price from rising further.
It's important to note that support and resistance levels are not exact numbers, but rather zones where the price is likely to experience difficulty moving past. Additionally, a previously established support level can become resistance when the price breaks through it, and vice versa.
Traders often use support and resistance levels to identify potential entry and exit points for their trades. For example, if a stock is approaching a resistance level, traders may consider selling the stock or taking profits, while if a stock is approaching a support level, traders may consider buying the stock or entering a long position.
It's important to remember that support and resistance levels are not a guarantee, they are a prediction based on previous performance, and the market can be unpredictable, therefore it's important to have a proper risk management plan in place and to consult with a financial advisor if needed.
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