Support, resistance and breakout

Price does not stop just anywhere. It stops at levels where a lot of trading happened in the past, and it moves sharply once it gets past them.

Why they form

If many people bought at a certain price, then when price comes back down to it, two groups show up at once: people who want to sell at breakeven and people who are happy to buy again at that price. That pressure makes support. Resistance is the reverse. People who bought at that price and sat on a loss wait to sell at breakeven.

Where they form

• Prior highs and prior lows. These are the prices most people remember.
• Price areas where volume piled up.
• The 50, 150 and 200-day moving averages. So many people watch the same lines that price really does react there.
• Round numbers like $100 or ₩100,000. These are psychological reference points.

Breakouts and false breakouts

Once price clears resistance, that resistance turns into support. But false breakouts, where price clears the level and falls right back, are common. There are three filters. Did volume rise clearly above normal? Did the close finish above resistance (an intraday break does not count)? Did price hold for a few days after the breakout without being pushed back? This is why Livermore required a breakout on heavy volume.

Breakdowns

When support breaks, that level becomes resistance. Many people use a support break as their stop, but price often bounces right after a break. Put the stop not just below the support line but at the point where you can admit your reason was wrong (Plan before entry).