Resistance - Stock Trading Glossary

Resistance is a concept in technical analysis that refers to a price level where selling pressure is expected to be strong, causing the price to stop rising or even reverse its direction. It is an important tool that traders and investors use to identify potential selling opportunities and to set price targets for their trades.

Resistance is typically plotted as a horizontal line touching previous highs in a chart. It is a level that has been tested multiple times in the past, and each time the price has failed to break through it. This creates a psychological barrier, where traders and investors expect selling pressure to increase, as traders who have held the stock at the previous high price may want to sell and take profits.

Resistance can occur at any price level, but it is especially significant at round numbers or psychological levels. These levels are often associated with significant milestones or events, such as earnings announcements, product launches, or market trends, and can trigger emotional reactions from traders and investors. For example, a stock that reaches $100 may face resistance as traders and investors who bought the stock at lower prices may choose to sell and take profits.

To identify resistance levels, traders and investors typically use technical analysis tools, such as chart patterns, trendlines, and moving averages. By analyzing previous highs and patterns in the stock's price, they can identify potential resistance levels and use them to set price targets for their trades.

Resistance levels can also be used in conjunction with other technical indicators, such as the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and the Average Directional Index (ADX), to confirm the direction of the trend and identify potential trading opportunities.

It is important to note that resistance levels are not always absolute, and the price of a stock may break through a resistance level at times. This can create a new support level, which is a price level where buying pressure is expected to be strong, causing the price to stop falling or even reverse its direction.

In summary, resistance is a technical analysis tool used to identify a price level where selling pressure is expected to be strong, causing the price to stop rising or even reverse its direction. Traders and investors use resistance levels to identify potential selling opportunities and to set price targets for their trades. Resistance levels can be identified using technical analysis tools and can occur at any price level, especially at round numbers or psychological levels.