What is a resistance line?

What is a resistance line?

A resistance line is the inverse of a support line and represents the glass ceiling through which a security price has difficulty breaking through. Resistance lines are calculated as part of analysis methods which use moving averages and standard deviation, or similar calculations, to put a range of probability on the expected movement of a security price, with the resistance line representing the top of that range.

Some methods use two resistance lines for two levels of possible deviation, each of which carry connotations as trading indicators. A resistance line will appear over a moving average line, which will have a support line under it which is the bottom range of likely movement.

In technical analysis, a level of resistance is an imaginary barrier that keeps the price of a security from rising beyond a certain level. Stocks sometimes spend a while approaching these prices, or crossing them, only to bounce back to a value around their moving average. If a trend carries the price through the previously defined support or resistance level, it might be called a “breakout,” in which the stock goes on to trade in a higher or lower range than it used to, and different numbers become the support and resistance. When prices break through a line of resistance it may mean that a correction downward is on the way, or that a new upward trend has begun.

Analysts are constantly looking for chart patterns to identify trading opportunities. The Channel Down pattern is a great example. The Channel Down shows a clearly defined downtrend and describes the behavior of the price contained between downward sloping parallel lines. Lower lows and lower highs characterize this price pattern. This pattern is created via a lower trendline connecting the swing lows and an upper channel line that joins the swing highs.

A breakdown below a descending channel’s resistance line points to a continuation of the decline momentum, while a breakout above the channel’s resistance line can show a possible trend change.

When a security is presumed likely to remain within the channel, traders can make bets on price fluctuations within the channel trendline boundaries. This type of trading strategy can be particularly successful when a trader has identified a reversal followed by a breakout series pattern. Selling bets can be made when the price reaches its resistance line. Going long on the security could also be profitable when a security begins to reach its support trendline.

This is just one of the plentiful ways to utilize technical analysis in trading. Augmenting these methods with artificial intelligence tools to generate trade ideas, analyze signals to execute advantageous trades, or myriad other options can help investors make rational, effective trading decisions.