Understanding Support and Resistance
Excerpt from BabyPips.com
Support and resistance is one of the most widely used concepts in trading. Strangely enough, everyone seems to have their own idea on how you should measure support and resistance.
Let’s just take a look at the basics first.
Look at the diagram above. As you can see, this zigzag pattern is making its way up (bull market). When the market moves up and then pulls back, the highest point reached before it pulled back is now resistance.
As the market continues up again, the lowest point reached before it started back is now support. In this way resistance and support are continually formed as the market oscillates over time. The reverse of course is true for the downtrend.
Here are two interesting points to remember:
- When the market passes through resistance, that resistance now becomes support.
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The more often price tests a level of resistance or support without breaking it, the stronger the area of resistance or support is.
While support works like a floor for market price activity, the ceiling would be called resistance. The easiest way to explain how it works is to imagine that the price is like a tennis ball. A ball will bounce off the floor when dropped and if you toss the ball up towards the ceiling, the ball will bounce back down once it bounced from resistance..
In a nutshell, support is the floor, resistance is the ceiling, and the price is the ball bouncing off of them.
