Support and Resistance Levels Explained

Support is a price area where declines have stopped before, and resistance is an area where advances have stopped before. The idea rests on memory in the order book and in participants' decisions: people who bought near a level, or who missed a move, may act again when the price returns to it. The zones are read off a chart from earlier highs, lows and areas where the price traded for a long time.

Levels are drawn as zones and not as exact lines, because the price rarely turns at precisely the same value. Many chartists describe a level that has been tested several times as stronger, although that is a convention and not a measured property. When the price moves through a level, a former resistance is often treated as new support and the reverse, a pattern called role reversal.

Published research has examined support and resistance levels in currency markets. A study at the Federal Reserve Bank of New York found that levels supplied by firms predicted short-term interruptions of the trend better than chance would, with a strength that varied by currency and by firm. A level nevertheless remains a judgement about the past: the price can pass through any of them, and different observers draw different levels from the same chart.