Support and resistance levels are among the most fundamental concepts in technical analysis, representing price points where supply and demand imbalances create barriers to price movement. Understanding these levels is essential for identifying potential entry and exit points.
Key Concepts
Support levels are price points where buying interest is strong enough to prevent further declines. These levels often form at previous lows, round numbers, or areas where significant buying occurred previously. For example, if EUR/USD has bounced from 1.0800 multiple times, this level becomes psychological support.
Resistance levels are price points where selling pressure prevents further advances. These often form at previous highs, round numbers, or areas where significant selling occurred. A level like 1.1000 in EUR/USD might act as resistance if the pair has failed to break above it several times.
Breakouts occur when price decisively moves through support or resistance, often signaling the start of a new trend. A breakout above resistance suggests buying pressure has overcome selling pressure, potentially leading to further gains. Conversely, a breakdown below support suggests selling pressure has overcome buying interest.
Trading Applications
Entry points can be identified near support levels in uptrends or resistance levels in downtrends, with the expectation that these levels will hold. However, traders should wait for confirmation, such as a bounce or rejection candle, before entering.
Stop loss placement should be beyond support or resistance levels to avoid being stopped out by normal price fluctuations. If buying near support at 1.0800, a stop might be placed at 1.0770, below the support level.
Profit targets can be set at the next resistance level in uptrends or support level in downtrends. If price breaks above resistance at 1.1000, the next resistance might be at 1.1100, providing a logical profit target.
