Support and Resistance concept is very popular among forex technical traders. Not only the concept is widely used but also might look slightly confusing at first glance, just like everything else in forex trading! It is however very important for you to understand support and resistance concept in order to fully understand forex charts. Don't panic though - there is no secret support and resistance cult that keeps all the explanations to themselves. The comprehensive explanation is right here.
Welcome to the forex war between supply and demand! Currency buyers (the bulls) bring the prices up while currency sellers (the bears) bring the prices down. The buyers control the prices at a certain level (support level) and do everything not to let the prices go below that level. The sellers also control the prices, but at a different level (resistance level) and do everything not to let the prices go above that level.
So far so good. Now you know that there are two indicators that dominate forex market and determine the price – supply and demand.
When there are more bears than bulls the currency price will be going down. Why so? That's because more and more sellers (our so called bears) will be lowering their asking price. The bears' objective is to discourage buyers (or so called bulls) from buying.
When there are more bulls than bears the currency price will be going up. Why so? That's because more and more buyers (our so called bulls) want to take their bid prices up. Their agenda is to force the stubborn sellers to sell.
Alright. But how does support and resistance fit into this picture?
The price level where there are a big number of BUY orders in the market is called SUPPORT.
The price level where there are a big number of SELL orders in the market is called RESISTANCE.
How to tell when support or resistance level is broken? This is not a simple question and there is no concrete answer to it. It is better to view support and resistance levels as areas rather then a definite numbers. Line chart is actually much more useful when it comes to finding those areas. Build your support and resistance lines around areas where the price movements are making several "hills".
Also, time plays an important role. Try to locate the areas where the price spends the least amount of time. That's the area where bears and bulls are picking up the offerings.