Support and resistance

Support is the area where price keeps stopping on the way down because buyers step in. Resistance is where sellers show up on the way up. Both are the market's memory: people who traded there remember the price.

Here's how that memory works. Someone who bought at 1.2700 and watched price fall to 1.2600 wants out at breakeven when it gets back to 1.2700, and those sales form resistance. Someone who sold there and profited is ready to sell there again. When the level breaks, the two sides swap roles.

That's why broken resistance often becomes support, and broken support becomes resistance. This role reversal is the single most useful part of reading levels.

Start by marking swing highs and swing lows, the points where price turned with lower or higher candles on either side. If price turned in the same area two or three times, you have a level. One touch is a possibility; three touches is a level.

Draw zones, not lines. Price doesn't react at the exact same tick every time; wicks overshoot a little, bodies fall a little short. Boxing the area between the wick extremes and the body closes keeps you from panicking because a level missed by three pips.

Then look at what everyone can see: round numbers like 1.2700 or 2,000, the previous day's high and low, the weekly open. These prices sit on a lot of screens at once, which is why they produce reactions.

Finally, factor this in: the more obvious a level, the more stops sit just beyond it. A few pips under an obvious low is where everyone who bought it has their stop. That's why price sometimes wicks into that area and closes back above it.

Covering the chart in lines. Draw one on every little swing and price is always next to some line, so none of them tells you anything. Keep only levels that have reacted more than once and have worked recently.

Treating a wick as a break. If price wicks above resistance and closes below it, that's a sweep, not a breakout; the stops above were taken and sellers did their job. A break is a candle closing beyond the level.

Chasing the breakout candle. Buy the top of the biggest candle because resistance broke, and there's no structure for your stop. The calmer route is waiting for price to come back to the broken level, the retest. If old resistance has turned into support, price holds there with lower wicks, and the stop goes below that zone.

Squeezing the stop a pip or two beyond the level. That's where everyone's stop sits, and price doesn't need much of a reason to wick into it. Put the stop where the idea is truly invalid, beyond the whole zone; if that's far, shrink the position, not the stop.

Every touch wears a level down. Price coming into support for the fifth time has already used up most of the buyers there, so the level is less likely to hold than it was on the first touch. Touches getting more frequent often come before a break.

Inside a strong trend, levels are short-lived. In a sharp sell-off, supports are rest stops, not destinations. Expecting a reversal at every level against the trend is one of the most expensive habits a trader can have.

Levels also lose meaning for a while around news. A data release can drive wicks straight through them. What you watch there isn't the wick but where the candle closes once things calm down.