Imagine a basketball bouncing in a room with a low ceiling. It bounces off the floor every time it falls, and bumps the ceiling every time it rises. The floor and the ceiling control where the ball can go.
Charts have floors and ceilings too. We call them support and resistance. They're the price levels where buyers consistently step in or sellers consistently take profit. They aren't magic — they're just where a lot of human and algorithmic decisions happen to cluster.
Support
A support level is a price where buying pressure has been strong enough in the past to stop falls. Each time the price dropped to that level, buyers showed up. Memory of that behaviour leaves a mark. Next time price visits that level, traders expect buyers to show up again — and many of them place buy orders just above it, which makes the prediction self-fulfilling.
Common sources of support:
- Previous lows — the obvious one.
- Round numbers — gold at $2,000, $2,100, $2,200. Humans love round numbers, so they cluster orders there.
- Major moving averages — SMA50 and SMA200 often act as dynamic support in uptrends.
- Old resistance that broke and got recaptured — once a ceiling breaks, it often becomes a floor on the next pullback.
Resistance
The mirror image. A resistance level is a price where sellers have repeatedly taken profit, exhausting demand and pushing price back down. Sources are the same: previous highs, round numbers, key MAs from below, and broken support flipping into resistance.
"Near support bounce risk" is a phrase you'll hear when price approaches a known support — it means the market might find buyers and bounce, so shorts should be careful.
Pivot levels
Some traders use a specific formula based on yesterday's high, low and close to calculate the pivot points for today — a central pivot, plus support and resistance levels above and below it (S1, R1, S2, R2). These are widely watched and tend to be self-fulfilling for the first hour or two of trading.
Stop-loss: the seatbelt
Now you've identified support. You think gold will bounce there. You buy. What happens if you're wrong? The price ignores your support and keeps falling. Without a plan, you'll either watch your loss grow or sell in panic at a much worse price.
A stop-loss is a pre-set order that automatically exits your position when price reaches a "this trade is wrong" level. You place it BELOW the support you bought near, so a real break of support triggers the exit cleanly.
The stop-loss isn't there to be hit. It's there so that the rare day it gets hit doesn't take you out of the game.
Target: where you're going
The target is the price level you're aiming for. Often the next resistance up from your entry. If you bought gold at $2,000 right above $1,990 support, with the next resistance at $2,050, that's your target. If price reaches it, you sell and take the profit.
Stops and targets together let you calculate something every disciplined trader cares about: the risk-reward ratio.
Risk/Reward ratio (RR)
The math is simple. Risk = entry minus stop. Reward = target minus entry. RR = reward divided by risk.
Continuing our example:
- Entry $2,000, stop $1,990 → risk = $10
- Entry $2,000, target $2,050 → reward = $50
- RR = $50 / $10 = 5:1
That's an excellent RR. You're risking $1 to make $5. You can be wrong 4 out of 5 times and still break even.
Trade quality is largely about RR. A trade with 5:1 RR is "excellent". 2:1 is "good". 1:1 is "poor" — you have to be right more than half the time just to break even. Below 1:1, the math is so bad that even a high win rate often doesn't save you.
Putting it together
A complete trade plan needs all four:
- Entry zone — the price (or narrow band) where you'll buy.
- Stop-loss — the price where the trade is invalidated.
- Target — the price where you'll take profit.
- RR — the math that tells you if the trade is worth taking.
If any of those four is missing, you don't have a trade — you have a guess. A trading system is just a repeatable way to find setups where all four line up favourably and then to execute them mechanically.