Most Important Concept
Support and resistance are the foundation of technical analysis. Master these, and you'll understand 80% of price movement. Every other indicator or pattern builds upon this fundamental concept.
What Are Support and Resistance?
Support
Support is a price level where buying pressure is strong enough to prevent price from falling further. Think of it as a "floor" - price bounces off it like a ball bouncing off the ground.
Resistance
Resistance is a price level where selling pressure is strong enough to prevent price from rising further. Think of it as a "ceiling" - price gets rejected when it hits this level.
Visual Representation
Support Example:
EUR/USD drops to 1.2000 three times and bounces each time → 1.2000 is support
Resistance Example:
EUR/USD rises to 1.2100 three times and gets rejected each time → 1.2100 is resistance
Result: Price trades in 100-pip range between support (1.2000) and resistance (1.2100)
Why Support and Resistance Work
S&R levels work because of market psychology and self-fulfilling prophecy:
1. Psychological Levels
Traders remember previous highs and lows. When price approaches these levels, they make decisions:
- At Support: "Price bounced here before, I'll buy"
- At Resistance: "Price got rejected here before, I'll sell"
2. Pending Orders
Many traders place orders at key levels:
- Buy limit orders cluster at support
- Sell limit orders cluster at resistance
- Stop-loss orders placed just beyond S&R levels
When price reaches these levels, orders execute automatically, creating actual buying/selling pressure that reinforces the level.
3. Institutional Traders
Banks and hedge funds have algorithms programmed to trade at significant price levels, amplifying the effect.
Self-Fulfilling Prophecy
S&R levels work BECAUSE traders believe they work. When enough traders act on a level, it becomes real. This is why obvious S&R levels on daily/weekly charts are more reliable - more traders see and trade them.
How to Identify S&R Levels
Step-by-Step Process
- Zoom Out: Start with daily or weekly chart to see bigger picture
- Look for Obvious Levels: Where has price repeatedly bounced or been rejected?
- Mark Horizontal Lines: Draw lines at these levels
- Prioritize: Levels tested multiple times are stronger
- Consider Zones: S&R is often a zone (range of prices) rather than exact price
What Makes a Strong S&R Level?
- Multiple Tests: Price has touched it 3+ times
- Recent Tests: Tested within last few months/years (old levels lose relevance)
- Clean Bounces: Price clearly respects the level (not just barely touches it)
- Volume Confirmation: High volume at the level (if available)
- Higher Timeframe: Levels on daily/weekly charts stronger than 15-minute levels
- Round Numbers: 1.0000, 1.1000, 1.2000 (psychologically significant)
Identifying Support Example
EUR/USD Daily Chart Analysis:
- March 2023: Low at 1.0500
- June 2023: Drops to 1.0510, bounces
- September 2023: Falls to 1.0490, strong rally
- January 2024: Touches 1.0505, reverses up
Conclusion: 1.0500 is a strong support level (tested 4 times over 10 months). If price drops here again, high probability of another bounce. If it breaks below, significant downtrend likely.
Types of Support and Resistance
1. Horizontal S&R (Most Common)
Description: Flat lines at specific price levels
How to Draw: Connect lows (support) or highs (resistance)
Best for: All trading styles
2. Trendline S&R (Dynamic)
Description: Diagonal lines following trend direction
How to Draw: Connect ascending lows (uptrend support) or descending highs (downtrend resistance)
Best for: Trending markets
3. Moving Average S&R
Description: Moving averages act as dynamic S&R
Common MAs: 20, 50, 200 EMA/SMA
Best for: Trend trading
4. Round Numbers (Psychological)
Examples: 1.0000, 1.1000, 1.2000, etc.
Why they work: Humans prefer round numbers for orders
Note: Extra strong at major levels (1.0000 stronger than 1.0500)
5. Fibonacci Levels
Key levels: 38.2%, 50%, 61.8% retracement
Use: Identify potential pullback support/resistance in trends
Best for: Swing trading
The Role Reversal Principle
Critical Concept: When support breaks, it becomes resistance. When resistance breaks, it becomes support.
Role Reversal Example
Initial Setup:
- EUR/USD has resistance at 1.2000
- Price attempts to break above three times, fails
- Finally breaks above 1.2000 with strong momentum
After Breakout:
- Price continues to 1.2100
- Then pulls back to... 1.2000
- This time, 1.2000 acts as SUPPORT (was resistance before)
- Price bounces from 1.2000 and continues higher
Why This Happens:
- Traders who missed the breakout get second chance to buy at 1.2000
- Breakout traders' stop-losses are below 1.2000 (if breaks back below, they exit)
- Creates buying pressure at old resistance → now support
Trading the Retest
This is one of the highest probability setups: Wait for breakout of major S/R level, then enter when price retests that level from the other side. More reliable than trading the initial breakout.
Trading Strategies Using S&R
Strategy 1: Bounce Trading (Range)
Setup: Price in clear range between support and resistance
Entry: Buy at support, sell at resistance
Stop-Loss: Below support (longs) or above resistance (shorts)
Target: Opposite side of range
Best When: Sideways market, no clear trend
Bounce Trade Example
- Support: 1.2000, Resistance: 1.2100 (100-pip range)
- Price drops to 1.2005 → Buy
- Stop-Loss: 1.1980 (25 pips below support)
- Take-Profit: 1.2090 (near resistance)
- Risk: 25 pips, Reward: 85 pips = 1:3.4 ratio
Strategy 2: Breakout Trading
Setup: Price consolidates at S/R level, building energy
Entry: When price breaks through with momentum
Stop-Loss: Back inside broken level
Target: Next S/R level
Best When: High volume, strong trend developing
Beware False Breakouts
Many breakouts fail and price returns to range (false breakout or "fakeout"). Wait for confirmation: close beyond S/R + retest, or use smaller position size until breakout confirmed.
Strategy 3: Retest Trading (Highest Probability)
Setup: Price breaks S/R, then pulls back to test it
Entry: When price bounces off retested level
Stop-Loss: Below/above the retested level
Target: Continuation of breakout direction
Best When: After clear breakout on higher timeframe
Strategy 4: Multiple Timeframe S/R
- Identify weekly/daily S/R levels
- Wait for price to approach these levels
- Switch to 4H/1H chart
- Look for reversal patterns or price action signals
- Enter with stop beyond the S/R level
Professional Secret
The strongest setups occur when multiple S/R factors align at the same level: horizontal S/R + round number + moving average + Fibonacci level = high-probability trade.
Common S&R Mistakes
Mistake #1: Looking for Exact Prices
S&R is not a line, it's a ZONE. Price might respect 1.2000 within ±5-10 pips. Don't obsess over exact numbers. Use zones instead of lines.
Mistake #2: Drawing Too Many Lines
Your chart shouldn't look like a zebra. Only mark OBVIOUS levels that stood out over time. If you have 50+ lines, you're overdoing it. Keep 5-10 most significant levels max.
Mistake #3: Using Irrelevant Old Levels
S/R from 10 years ago is not relevant. Focus on recent levels (last 6-12 months for swing trading). Market structure changes over time.
Mistake #4: Ignoring Timeframe Context
15-minute S/R is weak and easily broken. Daily S/R is strong and significant. Always prioritize higher timeframe levels over lower timeframe levels.
Best Practices
- Start analysis on daily/weekly charts
- Mark only the most obvious levels
- Think in zones (ranges) not exact prices
- Update your S/R levels monthly as structure changes
- Use horizontal lines as primary tool
- Wait for confirmation before trading breakouts
- Combine S/R with other analysis (patterns, indicators)
- Respect the levels - don't fight them