Support and Resistance – Technical Analysis Basics

Let’s try and explain support and resistance levels via dancing metaphors. Ever tried to tango like a pro? First, you need to find a partner. Next, you need to select a dance floor. Then, you need to feel the beat. And finally, you need to watch out not to get out of line.

This was a human tango. How do currency pairs dance on the dance floor? Pretty much a similar procedure. We put currencies in pairs and watch them moving on the chart (dance floor) as they listen to the beat (market news) and are on the watch for the market sentiment so that they won’t get out of line. These “lines” are called “support” and “resistance.”

Support and resistance are thought of as limitations for the currency pair to dance freely on the dance floor. All we need to do it to identify the support and resistance and use them to our analysis. If we figure where the pair is likely to stop moving further, we can make a better investment decision.

Support and resistance are two of the most discussed concepts in Technical analysis. They can come in various forms from very basic ones to more advanced and exciting ones. Let’s start with the basics.

As you can see, every time the pair tries to dance in a specific direction, it is stopped at the support or resistance level. It is actually the trading super-powers who determine the movements, and after that the little traders like you and I try to discover the barriers and patterns.

Experience traders (AKA Trading Grandpas) will be able to tell many stories about how certain price levels tend to prevent traders from pushing a currency pair price in a certain direction.

Resistance is a barrier that prevents the prices to go higher. That is because the super-powers are waiting at that level to sell the pair.

Support is a barrier that prevents the prices to go lower. That is because the super-powers are waiting at that level to buy the pair.