# Understanding Resistance: Key Concepts and Trading Strategies

> **Definition**
>
> In technical analysis, resistance is a price point or zone where selling interest tends to emerge, preventing an asset's price from rising further.

## What Is Resistance ?

Resistance is a foundational concept in technical analysis (along with its corollary: [support](https://www.investopedia.com/terms/s/support.asp)) with levels identified through chart analysis and trading tools. This concept is important when making informed trading decisions and performing market analysis. Resistance levels can indicate potential price reversals or continue trends. Strategies for trading at resistance levels, such as breakouts and short selling, include trendlines, moving averages, Bollinger Bands, and Ichimoku Cloud charts.

Resistance can be a single price, like the day's high or an hourly peak. Resistance can also be a zone, spanning several points like $0.50 to $1.00. A resistance zone represents a test of the resistance level, which may be broken by a small amount, but ultimately turns back the price advance, leaving the resistance level essentially intact. It could also be interpreted to mean that there is even more supply around the resistance zone, potentially signaling a reversal lower.

Resistance appears in any chart time frame. Daily or weekly charts show stronger resistance, while short-term charts, like hourly ones, reveal minor resistance, useful for day traders.  

### Key Takeaways

*   Resistance is a price zone that limits an asset's price from rising, often leading to a reversal.
*   Resistance levels can be identified using trendlines, moving averages, and visual inspection of charts.
*   Traders use resistance zones to make decisions, like placing stop-loss orders or taking profit.
*   Once resistance is broken, it can turn into a support level, known as the Polarity Principle.
*   Psychological "big figures" like round numbers often serve as potential resistance levels.

## The Role of Supply and Demand in Resistance Levels

[Demand](https://www.investopedia.com/terms/d/demand.asp) for an asset is what propels it higher over time, absorbing market supply along the way. Liquidity refers to the amount of total supply and demand at any given time. High liquidity usually limits price movement, while low liquidity can cause excessive price shifts, possibly creating a [gap](https://www.investopedia.com/articles/trading/05/playinggaps.asp).

The source of the demand may be a piece of macroeconomic news, such as a comment from a Federal Reserve official or an earnings release. After gains, demand might decrease or stop, indicating the end of a buying spree. If the price forms a [top](https://www.investopedia.com/terms/t/atop.asp), then it now functions as a point or zone of resistance.

[Supply](https://www.investopedia.com/terms/s/supply.asp) can come from multiple sources, such as take-profit selling around a resistance point or zone. Another example is where option holders may want to defend their option positions by selling a lot of shares at a specific price point ahead of resistance. And of course, macro news may pull traders in to short the market for a specific stock or other asset if negative news emerges, leaving a resistance point behind in its wake.

## Breaking Resistance: When and How It Happens

Traders use technical analysis to identify specific resistance points or zones. That resistance zone is likely to be tested amid an uptrend. If the trend and buying interest are sufficient to challenge a resistance point, traders may find that the resistance area breaks, bringing in yet more breakout buyers. [Stop-loss](https://www.investopedia.com/articles/stocks/09/use-stop-loss.asp) buy orders above the resistance area may also come in to play, bringing in yet another source of buying and clearly breaking above the resistance.  

After breaking resistance, sellers often test lower to see if the point holds. If it does, traders are likely to conclude that the break of resistance is valid and that the upside is in play. This is an example of a broken resistance level turning into support. Known as the Polarity Principle, once resistance is broken, it becomes support, and vice versa. Whether it becomes major or minor support depends on the resistance's time frame. A break above a recent daily high is more bullish than a break of an hourly resistance point.  

## Strategies for Trading with Resistance Levels

Once identified as a point of resistance, agile traders may seek to [sell short](https://www.investopedia.com/terms/s/shortselling.asp) on the approach to a particular resistance point, say $105 per share, or [take profit](https://www.investopedia.com/terms/t/take-profitorder.asp) on existing longs at or near to $105, both fresh sources of supply potentially reinforcing the resistance point. Traders who [went short](https://www.investopedia.com/terms/s/short.asp) ahead of the resistance on speculation will be looking to buy back once the anticipated down move looks like it is about to end, or does end.

If the price moves higher to test the resistance point, those take-profit sell orders may get filled, reducing one source of supply. If speculative short sellers also get their orders filled, another source of supply is now gone. Most likely, the short sellers probably have left stop-loss buy orders higher above the resistance point or zone, allowing a margin of error for [slippage](https://www.investopedia.com/terms/s/slippage.asp). Should the uptrend continue and eventually break above the resistance level, those stop-loss buy orders may get triggered, generating a new source of demand that pushes the price higher. Alert breakout traders may enter the market on the buy side, adding another source of buying demand.

## How to Use Trendlines to Identify Resistance Levels

Trendlines are strong tools for analyzing a security's price history and spotting resistance levels. The chart below shows an hourly view of NVIDIA Corp. stock ([NVDA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA)). Note how an hourly top is formed at 220.00/50 and is subsequently broken, leading to gains in the price to 230.00/50, which is tested again and holds—forming a double top in the process. Also, note that 220.00/50 later becomes a [pivot line](https://www.investopedia.com/terms/p/pivotpoint.asp), acting both as support and resistance on multiple occasions, respecting the notion of polarity, that broken resistance becomes support and vice versa.

![Hourly NVDA](https://www.investopedia.com/thmb/jv9sDHevxKXIGJmoKbk3Y0xZ_b4=/1259x0/filters:no_upscale():max_bytes(150000):strip_icc()/NVDAHourly-ef21203f315f4f36be998b0497e24e61.jpg)

**

Trendlines and simple patterns on the daily NVDA chart offer key price signals and trading opportunities. On the left side, a double top pattern is formed over several days, suggesting a top and opening up downside potential. The following lows create a horizontal trendline that holds after the price failed again at the $190-per-share level. The price eventually tests the $140-per-share trendline level, which holds, and the price goes into a strong upward channel, breaking above the $190 major resistance, and extends to the $230-per-share level. Another double top is formed there, suggesting that the uptrend is over for the time being.

![Daily NVDA](https://www.investopedia.com/thmb/dY_ixkK3Z-kibAV9Vr3WWi0Wadk=/1258x0/filters:no_upscale():max_bytes(150000):strip_icc()/DailyNVDAresistance-beb693c1ec48446db0251b5991cec3f0.jpg)

**

Alert readers may have noticed that the resistance levels encountered above are key and big round numbers like 140, 190, and 230. These are frequently referred to as psychological “big figures,” meaning traders pay close attention to these levels as potential zones of support and resistance. There may be no good reason to pay attention to them on their own, but psychological behavior makes them potential resistance levels.

## Techniques for Finding Resistance Levels with Trading Systems

Many different technical tools can be used to identify likely resistance levels based on mathematical formulas. Among them are simple and [exponential moving averages](https://www.investopedia.com/terms/e/ema.asp) (20, 50, and 100 are favorites), [Ichimoku Cloud](https://www.investopedia.com/terms/i/ichimoku-cloud.asp) charts, and [Bollinger Bands](https://www.investopedia.com/terms/b/bollingerbands.asp), to name a few.

Below is an example of a daily NVDA chart with Bollinger Bands overlaid. Bollinger Bands are a momentum indicator set at two standard deviations from a simple 20-day moving average in the center. As you can see, the upper Bollinger Band neatly contains the price advances over the course of weeks, giving traders an up-to-date upper resistance band. That level could be used to take profit on [long positions](https://www.investopedia.com/terms/l/long.asp), while the moving average in the middle identifies the overall trend.  

![Bollinger Bands ](https://www.investopedia.com/thmb/enWNz2-h3TtxckDtkp6wqWuTtrA=/1256x0/filters:no_upscale():max_bytes(150000):strip_icc()/NVDABollinger-7b9ad49b4d56437f9aee13bd7731661e.jpg)

**

## What Is Resistance?

Resistance is a price point or price zone that acts to limit gains in a security due to greater supply than demand.

## How Do I Identify Resistance Levels?

Resistance levels can be identified through technical analysis of charts and the various tools that come with them. Among the favorite tools used to identify resistance levels are key highs, trendlines, moving averages (simple and exponential), Bollinger Bands, and Ichimoku Cloud charts.

## How Do I Trade with Resistance Levels?

It depends on your position and view of the market, as resistance will eventually be broken at some point. An aggressive trader might go short from just below the resistance level, looking for a [pullback](https://www.investopedia.com/terms/p/pullback.asp) or [reversal](https://www.investopedia.com/terms/r/reversal.asp) lower, essentially speculating that the resistance will hold. That same trader would also likely place a [buy-stop](https://www.investopedia.com/terms/b/buystoporder.asp) order above the resistance zone in case it breaks. A breakout trader might jump in on the long side if the resistance area is breached. A trader who is long might want to place a take-profit order to sell near to the resistance zone.

## What Is the Polarity Principle?

The Polarity Principle refers to the price phenomenon whereby once resistance is broken, it becomes support, and vice versa. A break of a resistance zone will usually see a quick test of the breakout level to see if the break holds, or if it fails and reverses lower.

## The Bottom Line

Resistance represents price points or zones where an asset struggles to move higher, often due to increased supply or selling interest. Traders can consider various strategies around resistance levels. One could short sell below the resistance in anticipation of a pullback, or place buy orders above it, expecting a breakout. You may want to utilize technical analysis tools such as trendlines, moving averages, Bollinger Bands, and Ichimoku Cloud charts to accurately identify resistance levels.

Keep in mind that long-term resistance levels can have more significant implications for the asset's price direction compared to short-term levels. A breakthrough resistance can shift that level to become new support, known as the Polarity Principle, guiding future trading decisions. Once prices approach resistance zones, traders should be alert to price action to exploit potential trading opportunities, whether it's going with the trend for a breakout or betting on a reversal.