Support and Resistance are lines that illustrate the ongoing battle between the buyers (the bulls) and the sellers (the bears).
- Support levels indicate the price where the majority of investors believe that prices will move higher. As the price declines towards support and the price become cheaper, buyers become more inclined to buy and sellers become less inclined to sell.
- Resistance levels indicate the price at which a majority of investors believe that prices will move lower. As the price moves towards resistance and the price becomes higher, sellers become more inclined to buy and buyers become less inclined to sell.
See below a graph representing the support and resistance of the EUR/JPY.
As long as the price of a security moves between the support and resistance level, the trend is likely to continue. A break beyond a level of support or resistance can be the sign of:
- An acceleration of a trend
- A reversal of a trend
When a resistance level is broken, its role is reversed and it becomes a support level. Similarly, when a support level is broken, that level becomes a resistance level.
You will see below a graph representing a trend acceleration of the AUD/JPY where a resistance becomes a support level.
Support and resistance analysis is used by technical traders to make trading decisions and identify when a trend is accelerating or reversing. Being aware of these important levels should affect the way you trade and help you significantly improve your performance.