As one of the easiest to understand, support and resistance levels indicate where traders expect the price to meet a psychological barrier. The market has support when the price does not break down below the lower limit on several attempts. A resistance is the opposite. When the price does not break above an upper limit, this is a resistance.
At support and resistance levels, the price often tries to break through on several attempts. If these breaks fail, the support/resistance is said to be strong.
Psychological price levels such as big figures often create strong support and resistance levels. These psychological barriers may be due to the collective memory of traders. Sellers do not want to sell below a certain level because they consider it is too cheap. On the other hand, once the price reaches a certain high point, buyers consider it too expensive and wait for a pull back.
Think about it this way: something in a shop that’s priced at $9.99 usually sells more than at $10.01 – more than can be explained by a 2 cent price difference.
It’s important to note that support and resistances lines do not have to be horizontal. They appear in many other chart patterns. For example, within a channel, the price often bounces off the boundary zone but remains within the area of the channel. The horizontal lines that mark the channel act as support and resistance. This is shown in Figure 1.