Support, Resistance & Price Action

What are Support and Resistance?

Support and resistance are price levels where buying or selling pressure is strong enough to pause or reverse a move. They are among the most fundamental concepts in technical analysis — every trader, regardless of strategy, should understand them.

Support is a price level where buying interest is strong enough to prevent the price from falling further. Think of it as a floor.

Resistance is a price level where selling pressure is strong enough to prevent the price from rising further. Think of it as a ceiling.

Why Levels Form

Support and resistance exist because of market psychology and order clustering:

• Memory — Traders remember prices where they bought or sold. When price returns to those levels, they act again.
• Pending orders — Large institutional orders cluster at round numbers and historical levels, creating real buying/selling walls.
• Self-fulfilling prophecy — Because so many traders watch the same levels, their collective actions reinforce those levels.

Identifying Key Levels

Look for price levels where the market has repeatedly bounced or stalled:

• Swing highs and lows — The most obvious turning points on the chart. Multiple touches at a similar price strengthen the level.
• Round numbers — Prices like 1.3000, 50.00, or 100.00 attract orders and often act as support/resistance.
• Previous day/week highs and lows — Institutional traders watch these levels closely.
• Gap levels — Price gaps often get "filled," and the edges of gaps serve as support/resistance.

Role Reversal

One of the most important concepts: when a support level is broken, it often becomes resistance, and vice versa. This is called role reversal or polarity.

For example, if price breaks below a support level at 1.3000, that level often acts as resistance when price tries to recover. This happens because traders who bought at 1.3000 want to exit at breakeven, creating selling pressure.

Trend Lines

Trend lines are diagonal support/resistance levels drawn by connecting successive higher lows (uptrend) or lower highs (downtrend):

• Uptrend line — Connect two or more higher lows. Price bouncing off this line confirms the uptrend. A break below signals potential trend change.
• Downtrend line — Connect two or more lower highs. Price rejecting this line confirms the downtrend.
• Validity — A trend line becomes more significant with each touch. Two touches create the line; three or more validate it.

Key Candlestick Patterns

Candlestick patterns at support/resistance levels are powerful confirmation signals:

Pin Bar (Hammer/Shooting Star): A candle with a small body and a long wick. At support, a long lower wick (hammer) shows buyers rejected lower prices. At resistance, a long upper wick (shooting star) shows sellers rejected higher prices.

Engulfing Pattern: A candle that completely engulfs the previous candle's body. A bullish engulfing at support is a strong buy signal. A bearish engulfing at resistance is a strong sell signal.

Doji: A candle where open and close are nearly equal, showing indecision. At key levels, dojis often precede reversals. The direction of the next candle confirms the move.

Chart Patterns

Larger patterns formed by support and resistance include:

• Double Top/Bottom — Price tests a level twice and fails. A reliable reversal pattern.
• Head and Shoulders — Three peaks with the middle one highest. A classic trend reversal pattern.
• Triangle (ascending, descending, symmetrical) — Price compresses between converging trend lines before breaking out.
• Flag and Pennant — Short consolidation patterns within a trend, typically leading to continuation.

Practical Application

A complete trading approach using support, resistance, and price action: