If you are new to technical analysis, you may have already heard about the “levels of support and resistance”, since they are among the most important things. But what do the terms “support” and “resistance” really mean? Well, technical analysis is hard to understand without a chart, so let’s see one.
A support level is where prices could be expected to stop falling and start recovering. A resistance level is where prices might stop rising and head down. If it has happened in the past, it is likely to happen again in the future.
As the chart shows, AUDJPY started falling from around 96.30 down to 89.15, where the exchange rate found support and rose to 92.40. Then another decline to 89.35 followed. The support in this area did it’s job perfectly, which led the pair up to the resistance level near 92.50 again. And the resistance proved to be strong enough to send AUDJPY back down, where the support near 89.30 has eventually been broken and the downtrend continued. In other words, the support level is always below the current price and the resistance is always above it. Traders must observe both at the same time, in order to be prepared for the price’s reaction, when it gets to these levels.
Recommended reading: How to Recognize an Unreliable Support?
But support and resistance levels are not always horizontal like the ones shown above. Sometimes they have slope, which makes them harder to spot. That is why we use trend lines, in order to spot them easily. A 30-minute chart of USDJPY will visualize what this means.
In this case, USDJPY has been in an uptrend, until a pull-back occurs near 119.00. The pair then fell to 117.40, rose to 118.50 and fell to 117.20 again. If we connect the highs at 119.00 and 118.50 with a trend line, its projection into the future gives us a pretty clear image of where the resistance could be found. As the chart shows, as soon as 117.20 was touched, the uptrend resumed. The exchange rate broke through the resistance line, but later came back to touch it from the other side. This is a typical example of how the resistance turns into support and vice versa. It happens quite often, which is another reason why you should be observing the levels of support and resistance. It could definitely give your trading an edge.