Support and Resistance is best understood this way to me. In my house I have floors and ceilings. If I jump too high I will hit the ceiling (a resistance) and then I will fall down on the floor (a support).
Trading currencies, stocks, futures, whatever, is exactly the same. When your Forex currency pair you are trading goes up, and then stops, it hit an invisible resistance. Same thing when it is dropping, and stalls, it has hit a support level.
We will draw different colored horizontal lines at these support and resistance levels beforehand in anticipation that they will react to those levels. This makes it easier.
How about a chart...Daily timeframe.
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| This known as a "naked" chart, no indicators
Now let's look at a Daily chart with some horizontal lines drawn on it.
Red lines are resistance and green lines are support. |
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| Support (blue) and Resistance (red) |
The price went to the highlighted areas because of the herd mentality. People will trade as individuals but as a group they get nervous when points of resistance from the past are about to be reached...they start freaking out.
So I drew those horizontal lines for you to see that if you place one on your charts you can see if it has touched it several times or just a couple. When it has touched it several times you can bet that other traders looking at their charts will see it as major resistance. You need to know that.
Same thing applies for support levels (in blue). Price starts falling and where will it go? Past support levels are a very good indicator.
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