Support and Resistance in Stock Trading: How to Identify and Use Them Precisely?

What Are Support and Resistance? Essential Concepts Every Investor Must Know

In technical analysis, support and resistance represent the ebb and flow of buying and selling forces in the market. When the price declines, there is always a level at which buyers are willing to step in; this price level that prevents further decline is called support. Conversely, when the price rises, selling pressure often emerges, and the level that halts further upward movement is called resistance.

Simply put, support is the “bottom protection line” for the price, and resistance is the “ceiling.” By identifying these two key levels, traders can make more confident buy and sell decisions.

How to Accurately Identify Support and Resistance Levels?

Support and resistance levels have clear visual features on candlestick charts:

Support levels appear near the lows of the price. When the price repeatedly stops falling and bounces back at a certain level, it indicates effective support. To find support levels, look for horizontal lines connecting multiple lows on the chart.

Resistance levels appear near the highs of the price. Similarly, when the price repeatedly encounters resistance and pulls back at a certain level, that becomes a resistance. Resistance lines are horizontal lines connecting multiple highs.

Methods for Drawing Support and Resistance Lines

The core principle of drawing support and resistance lines is simple—at least two confirmation points.

• Drawing support lines: identify at least two (preferably three or more) obvious lows on the chart and connect them with a straight line. The steeper or more variable the slope, the more reliable the line tends to be.

• Drawing resistance lines: similarly, find at least two (preferably three or more) obvious highs and connect them. The more confirmation points, the higher the confidence in this resistance line.

What Happens When Support and Resistance Roles Reverse After a Breakout?

Support and resistance are not fixed. When the market breaks through a critical level, roles can switch—a key concept traders must understand.

Support turning into resistance: The price initially finds support at a certain level but suddenly breaks below it. Once broken, this former support level becomes a new resistance level. When the price rebounds, it will face selling pressure at this level, making it difficult to break through.

Resistance turning into support: The price initially faces resistance at a certain level but successfully breaks above it. After the breakout, this former resistance level becomes a new support level. Future declines will find buying support at this level.

Two Standards for Confirming a True Breakout

Not every touch of support or resistance line signifies a breakout. A genuine breakout must meet two conditions:

1. Closing Price Breakthrough: Focus on the closing price, not intraday lows or highs. A close beyond support or resistance by more than 3% confirms an effective breakout.

2. Volume Confirmation: Price breakout alone is not enough; it must be supported by volume. Volume should significantly increase, at least 30% above the recent 5-day average volume. Breakouts without volume support are often false signals.

How to Use Support and Resistance Lines to Develop Trading Strategies?

The practical application of support and resistance lines is straightforward:

Bullish (Long) Traders’ Strategy:

• Entry Point: Buy near the support line, as the probability of a rebound is higher.
• Stop Loss: Exit immediately if support is effectively broken downward.

Bearish (Short) Traders’ Strategy:

• Entry Point: Sell near the resistance line, as the probability of rejection is higher.
• Stop Loss: Exit immediately if resistance is effectively broken upward.

Practical Example: Applying Support and Resistance in Gold Price

Taking international gold prices as an example, we can see how support and resistance are applied:

Identifying Sell Signals: When gold continuously declines from a high of 2066 USD, levels at 1996, 1895, 1810, and 1725 USD become resistance. During the downtrend, gold tests these levels multiple times but fails to break through, each time being pushed down. Investors holding gold should consider selling near resistance levels with stop-loss orders.

Identifying Buy Signals: After falling to 1616 USD, gold begins to rebound. During the upward move, levels at 1616, 1719, and 1805 USD repeatedly support the price. As long as the price pulls back near these support levels, it presents a good low-entry buying opportunity.

Limitations of Support and Resistance Lines

It’s important to note that support and resistance are just tools within technical analysis. Relying solely on these indicators carries risks. Traders should combine 2 to 3 other technical indicators (such as moving averages, RSI, etc.) for cross-verification to make more reliable investment decisions. Support and resistance are fundamental but not comprehensive.