The Importance of Support and Resistance

You’ll often hear analysts talking about a certain security approaching a resistance or support. These are simply price levels or a range of prices that a security or currency doesn’t often go over which is termed as resistance and go under which is termed as support. Generally the Support is the level at which the price seldom falls below and the resistance is the level the price seldom exceeds. Each time the price hits the resistance or support, it appears the price has hit a wall and reverses at least in the short term.

Sometimes with stocks, a support or resistance level will be a round number such as 50,100 or 1000 that represents a psychological barrier to further increases or decreases in price. But in forex, keep in mind that a support or resistance level can vary and is often not an exact number. You should view support and resistance levels as zones rather than a specific number.

Support and resistance analysis is an important part of trends because it can be used to help make trading decisions and identify when a trend may be reversing. These levels can sometimes help a trader identify when to take profits. For e.g.-if a certain price levels is reached, the trader might want to take profits because he knows the price level seldom rises past a particular resistance level. Or alternatively if the trader identifies support level, the price seldom falls below, he could use that information to help him decide on an entry point to his position

The primary reasons why prices behave in the fashion of like hitting a wall and getting reversed because of supply and demand and market psychology. At support level the number of buyers generally exceeds the number of sellers and pushes the price back up and at resistance levels the number of sellers exceeds the number of buyers causing the price to go back down. This could occur frequently in a range until new material information is available that shifts the price to a new range, in which a new support and resistance level would be established.                 

Why role reversal happens? Once a resistance or support level is breached, the roles of resistance and support flip. If the price surges below a support level, the same support level will then become the new resistance level. Conversely, if the price surges above a resistance level, the same resistance will tend to become a new support level. The role reversal will only occur once a strong price move has shifted the price to a new range-often caused by major news or economic reports.

Support and Resistance levels are tools every trader should use and monitor.