What it measures
Unlike the other pages in this school, there is no single formula here. Support and resistance are marked by eye, and two people looking at the same chart will mark different levels. That is the first thing to know about them.
What they have in common is the raw material: the places where the price turned. A turn at the top is a swing high and a turn at the bottom is a swing low. Where several turns happened at about the same price, a reader draws a level. Below the current price it is called support; above it, resistance.
Other levels are calculated or simply noticed: round numbers, the previous day’s high and low, and pivot points, which are sums on the previous period’s prices (the classic pivot is (high + low + close) ÷ 3). To show how much the result depends on the rule, the chart on this page uses one stated rule and lets you change its three settings.
How it is calculated, step by step
- 01
Find the swing highs and swing lows.
A swing high is a bar whose high is higher than the highs of the S bars on each side of it. A swing low is the mirror image. S is the swing size.
- 02
Collect the prices of those turns.
The high of each swing high and the low of each swing low.
- 03
Group the prices that lie close together.
Sorted from the lowest, a price joins the group below it if it is within the zone width of that group’s lowest price. On this page the zone width is a multiple of the 14-bar ATR, so that it scales with how much the price has been moving.
- 04
Keep the groups with enough turns.
A group with at least M turns is a level. It is drawn at the average of its prices, as a zone one width deep.
- 05
Name them by where the price is now.
A level below the last close is support; a level above it is resistance. The same level changes its name when the price passes through it.
A swing cannot be recognised until S bars have passed after it. The most recent turn on any chart is therefore missing from the levels, and every level is, to that extent, late. This rule is one of many that could be written; it is here to be taken apart, not to be relied on.
A worked example, by hand
Six turns found on a chart, at 100.00, 100.40, 105.00, 100.20, 110.00 and 105.30. Zone width 0.50, at least 2 turns.
- Sorted: 100.00, 100.20, 100.40, 105.00, 105.30, 110.00
- 100.20 and 100.40 are within 0.50 of 100.00: one group of three
- 105.00 is more than 0.50 above 100.00: a new group; 105.30 joins it
- 110.00 is alone: one turn is not enough, so it is not a level
- Level 1 = (100.00 + 100.20 + 100.40) ÷ 3 = 100.20, with 3 turns
- Level 2 = (105.00 + 105.30) ÷ 2 = 105.15, with 2 turns
With the last close at 103, the level at 100.20 is support and the one at 105.15 is resistance. Widen the zone to 5.50 and the first five turns merge into a single level: the rule decides what is seen.
The numbers in this example were chosen to be easy to add up. They are not prices of anything.
How people read it
- As areas, not lines. A price rarely turns at exactly the same figure twice; readers mark a zone and expect the price to wander inside it.
- By the number of turns. A level where the price has turned several times gets more attention than one where it turned once.
- Role reversal. When a price rises through resistance, the same area is afterwards watched as support, and the reverse.
- Breakouts. A close beyond a level is called a breakout. When the price soon returns inside, it is called a false breakout, and these are common.
What it cannot tell you
- It cannot say whether a level will hold. A level is a record of past turns. Every level that ever broke had held until then.
- It cannot be exact. Different swing sizes, different zone widths and different amounts of history give different levels, and none is the true one.
- It cannot include the latest turn, which is not yet confirmed.
- It cannot say why the price turned. The usual explanations (remembered prices, orders resting near obvious levels, round numbers) are plausible, and none can be read off the chart.
Common mistakes
- Drawing a level as a hairline and treating a move a few points beyond it as decisive.
- Marking levels after the fact. With the whole chart in view it is easy to find lines the price ‘respected’; they were less obvious on the day.
- Drawing so many lines that the price is always near one. A chart covered in levels explains everything and so tells nothing.
- Assuming others see the same levels. Orders do gather near obvious prices, which is also why a level is often overshot before the price turns.
Questions people ask
- How are support and resistance levels found?
- Most often by eye: a reader marks the prices where a market has turned more than once. They can also be found by rule, for example by listing swing highs and lows and grouping those that lie close together, or calculated, as pivot points are from the previous period’s high, low and close. Different methods give different levels.
- Why would a past price matter to a market?
- Several explanations are offered: traders remember prices where they bought or sold, orders are often left at obvious levels and round numbers, and a level that many people watch attracts activity for that reason alone. These are reasonable, but none guarantees that a level will hold, and many do not.
- What happens when support or resistance is broken?
- A close beyond a level is called a breakout. Sometimes the price carries on; often it returns inside the old range, which is called a false breakout. By convention a broken resistance is afterwards watched as support, and a broken support as resistance. Nothing about the break says which outcome will follow.
The words on this page
An indicator is arithmetic on prices that have already happened. It describes what a price did; it does not predict what a price will do. The chart on this page is invented: a seeded random walk, not a market. This page is an explanation for study. It is not advice, a recommendation or a forecast, and nothing an indicator shows says anything certain about what a price will do next.