What are support and resistance?
Support is a price area where falling prices have stopped in the past, because buying interest at that price was strong enough to halt the decline. Resistance is the opposite: an area where rising prices have stalled, because selling pressure there was heavy.
Think of the bazar. When the price of hilsa falls to a certain point, lots of buyers turn up at once and it stops falling. When it climbs past a certain point, many people stop buying and sellers rush to sell. The same tug-of-war between buyers and sellers in the share market is the basic idea behind support and resistance.
Say that over six months a share’s price fell to around Tk 40 three times and bounced back, and rose to near Tk 55 twice and fell back. Chart analysts would call the area around Tk 40 support and the area around Tk 55 resistance. It does not mean the price can never go below 40 or above 55; only that it has paused there before. The numbers are only an example.
Why it matters to an investor
- To follow market talk: phrases like “support has broken” and “stuck at resistance” are heard all the time. Knowing the reasoning and its limits lets you weigh them properly.
- To spot your own mental traps: many people think “I’ll sell as soon as it gets back to what I paid”. That same thinking is believed to be one source of resistance.
- To understand the pull of round numbers: many orders gather at round prices such as Tk 100 or Tk 50, which can make prices behave differently there.
- To weigh the evidence: research finds some support for the idea, but the effect is small and unreliable. Knowing this helps you stay alert when someone calls a level “certain”.
Why such levels are thought to form
- Memory and regret: people who bought higher and are sitting on a loss often want to sell and get out when the price returns there. Those who missed a chance to buy cheaper earlier want to buy when it comes back down.
- Round numbers: people often set their buying and selling prices at round numbers, so many orders pile up at the same price.
- Everyone watching the same thing: if many people look at the same chart and place orders at the same spot, the idea can partly make itself come true.
- Role reversal: a common idea among chart analysts is that once resistance clearly breaks, it can later act as support, and broken support can become resistance.
- False breaks: it is very common for a price to cross a level and then fall back. That is why analysts treat these as areas, not exact lines.
What research says
In 2000, Carol Osler, an economist at the Federal Reserve Bank of New York, ran a test. Using the support and resistance levels that six firms published for the dollar against the mark, yen and pound from January 1996 to March 1998, she found prices bounced back about 60.8% of the time when they reached a published level, compared with about 56.2% for randomly chosen levels. So the published levels worked slightly better, but the gap was only 4–5 percentage points.
The same study found the firms agreed on the same level only about 30% of the time, and the levels they rated as “strong” did not actually work better. Whether anyone could have profited was not tested. A second study by Osler (2002) found that buy and sell orders in currency markets cluster around round numbers. These are results from the foreign-exchange market; we cannot assume the Dhaka share market behaves the same way.
Common mistakes
- Treating support as a floor: “it simply won’t go below this”. Bad news or a market-wide fall can break support easily.
- Drawing lines after the fact. Looking back, perfect support and resistance always appear; spotting them in advance is much harder.
- Treating one exact taka figure as a precise line instead of an area.
- Ignoring the company’s news and earnings and deciding on chart lines alone.
Support and resistance are a memory of where the balance between buyers and sellers shifted in the past, not walls for the future.