Support and Resistance
What this domain tests
This domain tests whether you can identify price zones where supply and demand have previously changed hands, and how to trade tests, breakouts and retests.
Core rules
- Support is a zone where buying has previously absorbed selling; resistance is a zone where selling has absorbed buying. They are areas, not exact prices.
- Role reversal: broken resistance often becomes support, and broken support often becomes resistance. The retest is the confirmation, not the break alone.
- The more times a zone is tested without breaking, the more attention it attracts, but repeated tests can weaken it because the resting orders are consumed.
- Volume matters: a breakout on expanding volume is stronger than a drift through the level. A low-volume breakout often returns to the zone.
- Confluence raises significance: a prior swing high, a round number, a 50% retracement and a moving average in the same area make a stronger zone.
- Gaps create support/resistance because no trading occurred inside the gap; the gap edges often act as reference levels.
Worked example
A stock fails at 250 three times, then closes at 254 on double average volume. The 250 zone is broken resistance. On a pullback, price holds 251 and turns up, so 250 to 251 becomes support. A trader who missed the breakout can buy the retest with a stop below 247; the prior resistance zone now defines risk.
Traps
- Drawing a single line and treating a one-tick overshoot as a failure.
- Buying a breakout without checking volume or the next resistance overhead.
- Assuming every retest will hold; failed retests often become reversal signals.
- Ignoring higher-time-frame levels that sit just beyond a short-term target.