What is meant by resistance?
Resistance and support provide buy and sell signals, respectively
Resistance and support are terms from chart analysis. There, the price development of securities, for example stocks, is subjected to a technical analysis. In addition to the uptrend, downtrend and sideways trend, resistance and support are important decision-making aids for investors to buy and sell. It is precisely these lines that numerous stockbrokers pay great attention to.
Resistance and support explained
Resistance is a horizontal line above the current price that has been created by multiple highs at the same level. It is an obstacle to the course that is difficult for him to break. A support is a horizontal line below the current price, which was generated by several lows at the same level. It basically supports the course against further setbacks. As a rule, the price remains in this corridor for some time, which is why an approach to the support line can be used for buying, and an approach to the resistance for selling.
Psychology as a cause of resistance and support
The reason for this continuity is psychological: There are always investors who bought the share at a high point (otherwise this price wouldn't exist!) And thus slipped into the red. They then want to sell their shares again with as little loss as possible, i.e. at the old high point. Therefore, there is an increased supply in this area and the price falls. Conversely, the demand for support increases because many investors consider the stock to be cheap at this price. Again, the more often these lines have been successfully tested, the stronger the resistance and support.
When a resistance or support is broken
If a resistance is broken, it means that the market participants no longer see the high price as expensive, but as cheap, which is why they continue to buy here. The resistance thus becomes a new support. Conversely, support is broken if the supposedly cheap price on the line is suddenly viewed as too expensive. Such changes in the price rating are mostly the result of unexpectedly good or bad company news.
Resistance and support as decision aids for investors
Anyone who wants to understand technical analysis and thus operate successfully on the stock exchange should deal with resistance and support. With the resistance and support lines, technical analysis has created an easy-to-use instrument and developed rules for their application. A resistance or support line becomes more meaningful, the more turning points there are on the line and the more trading activity prevailed when the price stayed in the area of the line. More turnover means that more investors have actively taken note of these points. If the price moves from below towards a resistance level, there is a high probability that the upward movement will stall. If the resistance line is broken, however, this is an indication that prices will continue to rise. From a chart analysis perspective, this is a clear buy signal. The upward movement in this case was strong enough to overcome the resistance. The same with the opposite sign applies to a support line.
Conclusion: resistance and support are given a lot of attention
Resistance and support are highly regarded by many followers of chart analysis and are therefore of great importance as decision-making aids for buying and selling securities. But company news relevant to decision-making, such as a profit warning or the announcement of a special dividend, can lead to a breach of the support lines upwards (special dividend) or downwards (profit warning). For investors, these are clear buy and sell signals.
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