What do support and resistance levels represent in trading?

Support and resistance levels are crucial concepts in technical analysis, reflecting price levels where a security historically tends to stop and reverse. They serve as indicators for potential changes in price direction.

Support is a level where the price tends to stop falling, as buyers step in to purchase the asset, believing it is undervalued. Conversely, resistance is a price level where selling interest typically emerges, causing the price to pause or reverse its upward trend. Traders use these levels to make decisions about entry and exit points, anticipating that the price will react to these barriers.

Understanding support and resistance helps traders gauge potential price movements and formulate strategies around those expectations, leveraging these levels for trade entries, stops, and profit-taking. This concept underscores the psychology of the market, as these price points reflect collective trader behavior and sentiment.

In contrast, while support and resistance levels may contribute to confirming market trends or assisting in identifying entry and exit points, their primary function is to indicate areas where price action is likely to face challenges, thus affecting potential future price movements.