Resistance can be modeled as a horizontal or oblique line, ascending or descending. It marks a price level that can temporarily or permanently block price progression.
During an uptrend, prices may struggle to exceed certain levels. These areas of confrontation between buyers and sellers, where sellers seem to have the upper hand, are called resistances. Conversely, the areas of confrontation where buyers seem to have the upper hand are called supports. The repetition of this blocking on at least two points of the chart allows, in chartist analysis, to draw a horizontal or oblique line to illustrate the resistance in question.
Discover a new way to generate income through Trading 2.0 with the ARYA Starter Pack !
When they meet a resistance, some traders bet on a breakthrough likely to lead to a bullish acceleration. Others, on the other hand, prefer to take profits when they come into contact with resistance, some even going so far as to initiate short sales.
While resistances are most often exploited when they appear directly on the price chart, some traders also analyze the formation of resistances on certain technical indicators such as the RSI. Some price indicators such as moving averages also act as resistance when they are above the price level. Finally, some chartist patterns are built in contact with resistance, giving them additional strength, such as the Double Top or the Triple Top. Before plotting and exploiting the resistances that you have identified on a chart, it is important to define your "margin of error".
From which distance would you consider that three points are not aligned ? If you choose a margin of error that is too large, you may detect too many resistances. Conversely, if you choose a margin of error that is too small, you risk not detecting enough resistances and leaving out some key levels... As always, rather than looking for a perfect geometric configuration, it is better to try to understand the underlying dynamics of these signals. Strong volumes in contact with the levels you have previously identified is a signal that other investors have spotted the same level as you !