Support and resistance levels are very important things to know for all traders. These levels help you to decide where to execute an order. Support levels are generally considered levels that prices couldn’t go under easily. And just like the opposite, the resistance levels are levels that prices can’t go over.
While doing technical analysis, it is almost mandatory to find support and resistance levels before opening a transaction. For an example, let’s look at these levels in a chart below.
As you can see in the EURUSD chart, there is a strong support zone at 1.1725-1.1730. Price has tested these levels more than 3 times and couldn’t manage to broke it. However, after many attempts with the help of some fundamental factors, EURUSD broke this support and fell sharply after. This is why you should always be more careful when prices near support/resistance levels. Because sometimes that can be a fake breakout and prices can go high again after testing support levels below.
Sometimes after break out, support levels will become a resistance and resistance levels can become a new support level. This situation is called Support and Resistance reversal. In the GBPUSD chart below, you can see that after support level is broken it worked as a resistance level.
Also, psychological levels can work as a support and resistance. For example, let’s assume that EURUSD exchange rate is 1.1400. In this situation, levels like 1.1450, 1.1500 and 1.1550 can be considered as resistance levels.
Analyzing support and resistance levels will help traders to identify trends or trend reversals. Also, after executing an order, traders can set take profit or stop loss levels by looking at these levels.