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Resistance refers to downwards price pressure at a set level identified by technical analysis. Resistance acts as a sort of barrier to price increases, and when the price of an asset successfully breaks through a resistance level it often starts a new, bullish trend. Alongside the related concept of support, resistance is one of the most important concepts in technical analysis as it allows traders to identify the beginning and end of price trends. It can be used in various markets, such as stocks, currencies, and commodities.
For example, if an asset has seen multiple increases in price, but which stop short at $10, this would be identified as a resistance level. The more times that the price has ‘tested’ the resistance level – approached it and then fallen away – the stronger the resistance is assumed to be. Resistance levels need not be a fixed price; some traders use diagonal lines to identify lines of resistance and trade graphically from these charts. Generally, however, a fixed price resistance level is assumed to be the strongest.
Technical analysis works by identifying trends, and a price move strong enough to break through a resistance level is often strong enough to start a new trend. An example of a resistance based strategy would be to open a long position whenever an identified resistance level is clearly broken, and exit after a reasonable profit. Identical inverted strategies exist for use with support, which is simply resistance in the opposite direction when prices decline.
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