Support and resistance are the actual outcome, or the result of, the interaction between fear and greed and supply and demand. Understanding how they all work together is like watching a magnificent, orchestrated dance. It also gives you a giant advantage for making money.

As you read, keep this statement in the forefront of your mind: for every action, there is a reaction.

Support and resistance will form the foundation for every trading decision. You can trade without oscillators and indicators and moving averages. You can even eliminate charts altogether from your financial decisions (although I wouldn't recommend it). But even floor traders in commodities pits who rarely see a chart will mentally compute where price resistance and support lie, even as they shout and use hand signals (called „open outcry“) to get their orders filled.

The concept behind support and resistance is a simple one, and once you digest it, you will have absorbed the basic premise underlying market moves.

Picture this: You're standing in the living room of a house, on the first floor. In your hands, you hold a ball. This ball equals the price of a stock. You toss the ball over your head. It soars upward, and hits the ceiling. The ceiling keeps it from rising higher, so the ceiling equals resistance. Now, the ball falls back down and bounces on the floor. The floor stops it from falling further, so the floor equals support.

Next, you spot a hole in the ceiling. You throw the ball as hard as you can, and it flies through the hole in the ceiling. It rises to the second-story ceiling and hits it. That ceiling equals resistance. Then, the ball falls to bounce on the second-story floor, which now forms support. Understand that the first-story ceiling supports the second-story floor. Result? Resistance becomes support.

Continue by running upstairs and grabbing the ball. Throw it back through the hole, down into the first-story living room. When it drops through the hole in the floor, it breaks through support. It falls to bounce on the living room floor, or previous support.

Then, it rises to hit the ceiling, or previous resistance. Run back down the stairs. Take the ball and toss it through a hole in the floor. The ball descends to the basement floor, which forms support. Then, it rises to bounce off the basement ceiling, resistance. Just above the basement is the living room floor, which uses to provide support. So now, previous support forms resistance.

The below figure illustrates support and resistance.

When the ball, which we'll now think of as a stock price, bounces off of support or resistance, we refer to it as a pivot point, which is illistrated in the below figure.

As you study support and resistance, remember, they are price areas. You will have to find a specific price to refer to, for example $54, but give it a little leeway. Picture yourself jumping on a trampoline. The trampolin.e supports you when you land on it, but the depth of your bounce varies a little each time. Also, just as heavier people stretch the trampoline base lower when they land, more volatile stocks need a little extra latitude in theif resistance and support areas.

Since you now know what support and resistance look like, let's quickly find out how they actually form. Go back to imagining the ball bouncing from floor to ceiling in the basement. Now, apply that to a stock in a Stage One, or basing price pattern. The basement floor is support, and we call it that because buyers are supporting the price. Were it to start lower, buyers (greed + demand) step in and accumulate, thus keeping the price from sinking lower.

When the price rises to the basement ceiling, it hits resistance. Resistance equals buyers who jam their hands in their pockets and refuse to pay a higher price for the stock. Also, resistance equals supply. At this point, some previous buyers, as mentioned before, revert into sellers. Afraid (fear) the stock will rise no higher, they offer their stock for sale, thus flooding the market with supply. If the stock falls here, the next time it rises to return to this price area, it may sell off again. Why? Because we have memories!

Say the stock shoots through the resistance (supply is absorbed). Maybe the sector it inhabits is in a favorable spotlight, the bulls are in control of the market, or the company itself enjoys a spurt of good news. The price will continue to rocket-maybe for hours or days-until a new factor suppresses it. When it „sells off,“ that pivot point creates fresh resistance. The stock then falls to the earlier resistance area, which is now the „floor,“ or support. It will hold there if buyers absorb the supply, and in so doing, „support“ it.

Support and resistance levels apply on every chart you'll ever see, whatever the time frame. In fact, you may have guessed by now that all the applications you'll learn about charts hold true on all time frames. That means the concepts you find in these pages pertain not only to swing-and-position trading, but also to strategies including active trading and traditional buy-and-hold investing.

The below figures show support and resistance areas on a weekly chart, a daily chart, and a fifteen-minute intra-day chart. As you study these charts and observe support and resistance levels, you may be amazed athow reliable they are!