Fundamentals of Technical Analysis: Support and Resistance Points

Technical analysis is the art of predicting future price trends by examining past price movements. At the core of this analysis method lies the assumption that prices do not move randomly and form specific trends. The two most basic and widely used concepts of technical analysis are support and resistance levels. Identifying support and resistance points correctly is of vital importance for an investor to optimize buy-sell decisions and minimize risks. These concepts represent the psychological limits of buyers and sellers in the market.

A support level is the price level where a falling stock price is expected to stop and turn upward. As this level is approached, the appetite of buyers increases, and selling pressure decreases. With buyers entering the market, further decline in price is prevented. Support levels can consist of bottom points where the price has bounced back several times in the past, or psychological round numbers. A break of the support level indicates that the selling pressure in the market has exceeded the strength of the buyers and usually leads to an acceleration of the downtrend.

A resistance level is the price level where a rising stock price finds difficulty passing and selling pressure increases. When the price reaches this level, investors holding the stock start taking profits, while new buyers avoid purchasing, thinking the price is expensive. When the strength of sellers is greater than buyers, the price cannot cross the resistance and pulls back. Resistance levels can also consist of peaks that the price could not overcome in the past, or critical moving averages. A breakout of a resistance level upward with high volume is a sign that the uptrend is strengthening.

When performing support and resistance analysis, it is extremely important to pay attention to trading volume. The validity of support and resistance levels broken with high volume is much higher. In addition, a broken resistance level starts to act as support in the future; likewise, a broken support level becomes a resistance in the future. This is called role reversal (polarity). Investors should draw horizontal lines on charts by paying attention to these rules and observe the interaction of the price with these lines.

On the technical analysis charts we share instantly on our Telegram channel and in our depth bot, we frequently emphasize these critical levels. Purchases to be made from the support level and stop-loss orders to be placed close to the resistance level are the most effective methods to protect your capital. Instead of using technical analysis alone, supporting it with depth data and brokerage house distributions will multiply your success rate. As Sermaye Borsasi, we advise our investors to follow a disciplined analysis process.