Two terms that are commonly misunderstood by inexperienced technical traders are support and resistance. You will notice that price levels cause responses by the market. In a falling market, prices will “bounce” off the base of low levels, which we term support. When the prices have a difficult time breaking above a certain point, resistance has been met. Some traders will refer to support and resistance as demand and supply.
Support and resistance lines are basically trend lines. The support line is below the price structure and the resistance line is above it.
(Figure 1) These lines represent floors or ceilings that a price has difficulty breaking through. The more times a support or resistance line is tested, the more accurate it becomes.
If a support line is tested three or more times and breaks above, it then becomes a new resistance line, as in Figure 2.
The same can be said when a resistance line is broken. If the trend travels through the line after testing it a few times, it becomes a new support line. (Figure 3)
Figure 1 Support line is below the price structure, resistance line is above it. (If resistance is broken, it becomes a new support.)
Figure 2 Broken support line becomes new resistance line.
Figure 3 Broken resistance line becomes new support line.