One of the most important aspects of trading is being able to identify support and resistance levels. What are support and resistance levels?

Support and Resistance Levels

A Support Level identifies an area where demand is greater than supply. It is a place where buyers are more likely to overwhelm sellers causing the prices to move up. It’s as though there is a floor on the chart that is supporting prices from falling any further, hence the name support level.

A Resistance Level identifies an area where supply is greater than demand. It is a place where sellers are more likely to overwhelm buyers causing prices to move down. It is as though there is a ceiling on prices that prevents prices from moving up any further. On the charts, it’s called a resistance level, where prices meet resistance that prevents it from moving higher.

So when you can identify areas of support and resistance, that’s where you want to either buy (at support) or sell (at resistance)!

The picture below show you what support and resistance levels look like:

And when prices break through support or resistance levels, support can become resistance and resistance can become support!

You can see that when support is broken, it can turn into resistance. The same goes for resistance levels that are broken. Resistance levels can turn into support levels too!

Strength of Support and Resistance Levels

In theory, the more a support or resistance level is tested, the stronger it is expected to be. However, you won’t really know how many times a support or resistance levels is tested until it’s over, right?

So I personally feel that this concept comes in useful only when a significant support or resistance level is broken. This would indicate that a significant change in trend is probably happening!

Let’s Look At Some Charts!

OK, now that you know what support and resistance levels are, let’s look at some charts.

In the chart above, you can see that prices move down when they hit into resistance levels, and prices move up when they fall into support levels.

When support levels are broken, they can turn into resistance levels as can be seen in the next chart.

Support and Resistance Using Historical Price

You can see that support and resistance levels are very useful in trading. Your job as a trader is to identify these areas of support and resistance so that you can profit from them!

Some Tips

Support and Resistance levels are more of an “area” than a specific price. This is because prices sometimes tend to “overshoot” these support and resistance areas.

There is a theory that it happens because traders like to put stops just above or below these support and resistance lines, and the forex brokers tend to go “stop hunting” to take these stops out.

However, it’s more likely that it’s because orders tend to get clustered around these areas of supply and demand. There are traders who place stops there, and there are traders who place orders to trade in the direction of the break. And because support and resistance levels are where orders are clustered, prices tend to move towards them.

But whatever the theory is behind it, what is more important is that support and resistance levels are a very powerful tool in your trading toolkit! The bottom line is that you want to be buying at support and selling at resistance.

And when you combine the trend together with support and resistance levels, you can have a very powerful way of looking at the markets!