Support, Resistance, and Supply/Demand Zones

What Support and Resistance Actually Are

Support and resistance are not magic lines. They are price levels where significant order activity has previously occurred — where buyers have overwhelmed sellers (support) or sellers have overwhelmed buyers (resistance). These levels matter because institutional traders remember them and return to trade from them.

How to Draw Valid Levels

A valid support or resistance level has at least two significant price reactions. The more times price has respected a level, the more significant it is. However, there is a counterintuitive rule: the more times a level is tested, the weaker it becomes. Each test depletes the orders sitting at that level. A fourth test of support is not as strong as a first test.

Supply and Demand Zones

Supply and demand zone analysis extends the concept of support/resistance to areas rather than single price lines. A demand zone is a price area where a significant bullish move originated — the implication is that unfilled buy orders remain in that zone. When price returns to it, those orders may be filled, causing a bounce.

Role Reversal

One of the most powerful concepts in technical analysis: when a support level is broken convincingly, it becomes resistance — and vice versa. This is not a rule that always holds, but it reflects the underlying psychology: buyers who were stopped out at a former support level now have a reference point and may become sellers if price returns to that level.

Common Mistakes

Over-drawing levels is the most common mistake. Every chart should have a handful of truly significant levels — not 20 horizontal lines cluttering the screen. If every level is significant, no level is significant. Be selective.