What Is Resistance?
In regards to price action, resistance is a price level (or price range) that provides opposition against upward movement. It can be created by prior local highs and lows, moving averages and other indicators, or even fundamental factors of an asset.
Resistance is the opposite of support, which inhibits downward movement. Together, the concept of support and resistance is one of the most important foundational ideas in technical analysis.
While not impenetrable, they act as limiters on trend.
Simply put, resistance helps hold prices down.
During uptrends, resistance often leads to bearish rejections, the beginning of consolidation, or full-on reversals. During overall downtrends, it often puts an end to rallies.
Logically, this makes areas of strong resistance a smart place to enter (or add to) short trades.
But practically, it’s not always this straightforward.
How Resistance Works
Like virtually all aspects of price action:
Resistance is a manifestation of the laws of supply and demand.
Price decreases when selling pressure outweighs buying pressure.
In its simplest form, resistance is constructed on the way down. As sellers enter trades at specific prices, those prices tend to become resistance. The main reason for this is that if price comes back up to those levels, many sellers will be inclined to add to their positions or re-enter after taking profits. This can sometimes be seen via standing limit orders on the order book.
The greater the volume traded at any given price, the stronger the resistance is likely to be. There are a variety of tools you can use to represent this “volume profile” visually.
There is also a common rule of thumb that states:
“Broken support becomes resistance, and vice versa.”
That is to say, when price breaks below a level of support, that level has an increased chance of acting as resistance from then on. However, this is not guaranteed and you may want to wait for the level to be retested as confirmation. In fact, some schools of thought state that a price level is not officially resistance until it has been tested at least three times.
To some degree, resistance becomes stronger with more tests—though this is not a strict rule and even a potentially dangerous blanket statement.
More complex forms of resistance may stem from numerical relationships like fibonacci levels, moving averages, and other calculations. And even certain “round” numbers like $25, $100, or $1000 can act as a sort of psychological resistance.
Regardless, context is important. Blindly trading support and resistance is almost never a winning strategy.
A real trader knows they need more weapons in their arsenal.