Support and resistance is the most widely used concept in trading, and is utilised by almost every single professional trader on the planet.
The concept is quite simple, when price reaches a certain level and reverses, the level at which it reversed will be remembered in the future and price may react to it again.
The idea is that the level at which price reverses on its way up is called resistance, and the level at which price reverses from on its way down is called support.
The illustration above shows this clearly as price comes away from the red upper lines, this is now considered resistance and as price comes up off the lower green lines this level is now considered support.
The expectation is that as price approaches these same levels in the future it will have a similar reaction.
There are two main ways to trade these levels, Break Outs and Reversals.
A break out is where traders try and determine when a support or resistance level has failed to hold in the expectation that if it does fail, price will continue on through it.
A reversal is where traders expect the price to bounce off or reverse from a certain level.
Reversals are slightly easier to trade than break outs simply because it’s really obvious and easy to see if the price has bounced off a certain price level, and so you can plan trades like stop losses really easily.
Breakouts are much harder to define because it’s difficult to know exactly when price has broken a level and won’t come back to it.
One important thing to know about support and resistance is that areas previously acting as resistance become support once price has broken up above them, and areas that previously acting as support act as resistance once price breaks below them.
As you can see above once price breaks down below support and then comes back up towards that same price level the expectation is that It may become resistance.
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