Support and resistance are among the most important concepts in technical analysis. These price levels represent areas where buying or selling pressure has historically been strong enough to stop or reverse price movement.
What is Support?
Definition
Support:
- Price level where buying interest emerges
- Floor that prevents further decline
- Demand exceeds supply
- Price bounces up from level
Why Support Forms
Reasons:
- Buyers see value at price
- Previous buyers defend positions
- Technical traders buy at level
- Psychological attraction
What is Resistance?
Definition
Resistance:
- Price level where selling interest emerges
- Ceiling that prevents further advance
- Supply exceeds demand
- Price bounces down from level
Why Resistance Forms
Reasons:
- Sellers see fair value reached
- Profit-taking occurs
- Technical traders sell at level
- Psychological barrier
Identifying Support and Resistance
Previous Highs and Lows
Most Basic Method:
- Previous highs become resistance
- Previous lows become support
- Clear, objective levels
Multiple Touches
What Touches Tell You:
- More touches mean more traders are watching the level
- They do not make it more likely to hold
- Watch for eventual break
In tests for Forex Trading Strategies (ch. 3), extra touches did not make a horizontal level stronger: its edge over a matched placebo ran +0.1, +1.8 and −1.0 points by test number.
Swing Points
Identify:
- Swing highs
- Swing lows
- Mark on chart
Round Numbers
Psychological Levels:
- $50, $100, $1,000
- Natural barriers
- Many orders cluster
Moving Averages
Dynamic Levels:
- 20, 50, 200 MA
- Move with price
- Act as support/resistance
Gap Levels
Gap Areas:
- Gaps often fill
- Gap edges become levels
- Watch for reactions
Support and Resistance Zones
Levels vs Zones
Reality:
- Exact levels rarely hold perfectly
- Think in zones
- Price area, not exact line
Creating Zones
Method:
- Mark the level
- Add buffer above/below
- Watch zone for reaction
Zone Width
Depends On:
- Timeframe
- Volatility
- Asset class
Role Reversal
The Principle
Key Concept:
- Broken support becomes resistance
- Broken resistance becomes support
- "Polarity" principle
Why It Works
Psychology:
- Trapped traders at level
- New reference point
- Self-fulfilling
Trading Role Reversal
Strategy:
- Wait for break
- Wait for retest
- Enter on confirmation
Strength of Levels
Factors That Strengthen
Stronger When:
- Clear prior reactions
- Higher timeframe
- High activity at level
- Long time since formed
Factors That Weaken
Weaker When:
- Too many touches (worn out)
- Lower timeframe
- Low volume
- Recently formed
Fresh Levels
Often Best:
- Untested levels
- First touch most powerful
- "Fresh" support/resistance
Trading Support and Resistance
Bounce Strategy
At Support:
- Price approaches support
- Watch for bounce signals
- Buy with stop below support
- Target resistance
At Resistance:
- Price approaches resistance
- Watch for rejection signals
- Sell with stop above resistance
- Target support
Breakout Strategy
Support Break:
- Price at support
- Breaks below with volume
- Short on break or retest
- Support becomes resistance
Resistance Break:
- Price at resistance
- Breaks above with volume
- Buy on break or retest
- Resistance becomes support
False Breakouts
What They Are
False Breakout:
- Price breaks level
- Quickly reverses
- Traps breakout traders
Avoiding False Breakouts
Methods:
- Wait for confirmation
- Volume confirmation
- Close beyond level
- Wait for retest
Trading False Breakouts
Strategy:
- Recognize the trap
- Fade the false break
- Stop beyond false break high/low
Multiple Timeframe Levels
Higher Timeframe Priority
Hierarchy:
- Monthly > Weekly
- Weekly > Daily
- Daily > Intraday
Confluence
Strongest: When multiple timeframes show same level
Marking Levels
Process:
- Start with highest timeframe
- Mark major levels
- Move to lower timeframes
- Add additional levels
Drawing Support and Resistance
Best Practices
Guidelines:
- Use candle bodies primarily
- Consider wicks for zones
- Don't force exact lines
- Adjust as price action develops
Horizontal Lines
Basic Method:
- Connect swing points
- Horizontal line across chart
- Mark area, not just line
Zones on Chart
Visual Method:
- Rectangle across price area
- Shows zone clearly
- Easier to read
Common Mistakes
Too Many Levels
Problem: Lines everywhere, no clarity
Solution: Focus on major levels only
Ignoring Timeframe
Problem: Trading minor levels
Solution: Higher timeframe = more important
Expecting Perfect Bounces
Problem: Price doesn't touch exact level
Solution: Think zones, not lines
Key Takeaways
- Support is where buying emerges
- Resistance is where selling emerges
- Think in zones, not exact lines
- Broken levels reverse roles
- Extra touches do not make a level stronger
- Higher timeframes more significant
- Wait for confirmation at levels
- False breakouts are common
What's Next?
Learn about trend lines and trend analysis.
This article is for educational purposes only and does not constitute financial advice.