Support and Resistance: The Basics of Technical Analysis

Support and resistance lines are the most simple form of technical analysis. In using support and resistance lines, a trader marks places on a chart at which they believe the price will rise or fall.

Let’s get the basic understanding out of the way before moving forward:

In the diagram above, you can see that support lines are drawn where the currency pair tends to rise. On the other hand, a resistance line is drawn at a price where the currency pair tends to fall.

When price hits resistance, sellers enter the market, and previous buyers sell. When the price hits support, short-sellers leave the market, and previous sellers buy to cover their trades. The result is a reversal in the movement of the currency pair.

Drawing Support and Resistance Lines

Support and resistance lines are best understood as areas on a chart rather than perfect lines. New traders often confuse support and resistance as being perfect, when it is very much an inexact science.

A currency pair can fall below a support line before rebounding, just as it can rise above a resistance line before falling. For this reason, traders should look at a support and resistance line as an area, and not a perfect point on a chart.

Take a look at the following chart:

We see that the price fell modestly below support. In the grand scheme of things, the very small dip below support is hardly reason to give up on this being a support line.

Now look at the whole of the chart:

As you can see, the chart did break support, but in the long-run, the price rebounded nicely and traders who did not think support and resistance had to be particular points on a chart came out with a very nice profit!

Finding Support and Resistance

When we talked about the different types of charts, we mentioned that line charts weren’t necessarily the best type of chart to pick because they don’t reflect the highs and lows at certain points. However, this is a benefit in making support and resistance “areas” easier to see on a chart.

Take a look at this line chart:

Now compare it to this candlestick chart:

As you can see, line charts help us filter out the noise in the chart to find broad areas of support and resistance. The support and resistance lines found in the line chart did apply to the same data represented with a candlestick chart. However, the line chart helped us to better identify support and resistance because we did not have all the data.

There are a few other things you should know about support and resistance:

1. Support and resistance becomes stronger as the market confirms it. That is, when prices bounce off support, that support line is now stronger as traders see its value as a support line. The same is true for a dip off a resistance line.
2. Support and resistance lines can flip-flop. If prices move sharply through a support line, the support line often becomes a resistance line for a future movement upward. Likewise, if prices move sharply through a resistance line, the resistance line will become a future support line for the new higher price.
3. You can also use support and resistance to trade “breakouts.” When a longstanding support and resistance line breaks, then move to the upside will be very large. The strength of the breakout is determined by how long traders have used the level as support or resistance.
4. Support and resistance often have fundamental reasons for being support and resistance. For example, traders with long positions in a currency pair may choose to set their “take profits” at 1.5000, an even number. Therefore, traders have put a lot of orders in to sell at 1.5000, so 1.5000 may act as a strong resistance line. This is known as “psychological resistance.”

In the next lesson, we’ll focus on the diagonal support and resistance lines, known as “trend lines.” Proceed to the next article.