Resistance Level
From Timetotrade
A resistance level is a price point where an equity's price pivots and changes direction. They are formed when you can draw a horizontal line between two or more price pivot points.
The resistance level is the highest price that an equity trades at, over a period of time. The more frequently a resistance level is tested (i.e. hits a previous resistance level price pivot point but does not rise above it), the stronger the resistance at that level. Some traders believe that the stronger the resistance at a given level, the less likely it is to break above that level in the future. It is said that if an equity breaks prior levels of resistance only by a small portion, it will increase until a new level of resistance is reached or established.
A resistance level can become a support level if the price of the equity increases above the resistance level; similarly a support level can become a resistance level if the price of the equity falls below the resistance level as illustrated in the following Paychex (PAYX) price chart example:
If a stock price is moving between support and resistance levels, then a basic investment strategy commonly used by traders, is to buy a stock at support and sell at resistance, then short at resistance and cover the short at support as per the following example:
When judging entry and exit investment investment timing using support or resistance levels it is important to choose a chart based on a price interval period that aligns with your trading strategy time frame. Short term traders tend to use charts based on interval periods, such as 1 minute (i.e. the price of the equity is plotted on the chart every 1 minute), with longer term traders using price charts based on hourly, daily, weekly or monthly interval periods.
Typically traders use shorter term interval charts when making a final decisions on when to invest, such as the following Paychex example based on 1 month of historical data with price plotted every 1 hour. In this example the early indication of a change of trend was when Paychex started forming a resistance level at approximately $39.67. The change of trend was then confirmed when Paychex started forming lower highs and lower lows.
You can use the TimeToTrade to create rising and falling price threshold alerts to notify you when a stock or option hits a support or resistance level.
Further Reading
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