What is Support and Resistance?
Support and Resistance, or S&R as it’s commonly known in trading circles, shows key price points where buying activity matches selling activity in a security. Prices are usually driven up by demand until they reach a point where there is no more demand – resistance – or driven down to the point at which there is significant demand – support – for the price of that security. Bulls buy, and Bears sell.
If demand remains for something, it’s value increases and resistance can be broken, with price reaching new highs. If there is low demand, support can fail, bringing new low prices to the value of a security.
In the below example, you can see both support and resistance at various points throughout the Price Chart. This is GBP/USD on a Daily timescale from March 2017 to August 2018.
Support and Resistance is not an exact science. As the below example shows, in around June of 2017 at Point A, GBP/USD runs into some resistance at the 1.30000 level, or thereabouts. Price retreats away again over the next few weeks before buyers come back into the market, driving the price back to Point B in July 2017. Price again then retreats temporarily before blowing through resistance and seemingly making it invalid for several months until October 2017, when price begins to fall and the old resistance level now becomes support at Point C and Point D.
This is a strong indication that there has been a support/resistance switch, and indeed price trades strongly away for the next few months, before falling back and once again testing support in July 2018 at the 1.30000 level.
At this point on the chart, it remains to be seen whether support will remain at this level, or if support is to again become resistance if price were to fall through the 1.30000 barrier.
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