Support and Resistance

One of the foundations of technical analysis is the idea of support and resistance levels. Support and resistance levels are prices that the currency has a trouble going above and below, and can be used to help determine future price action.

One of the reasons why support and resistance levels exist is because prices are near an equilibrium, and that the equilibrium is somewhere in between the support on the bottom and the resistance on the top.

Support and resistance frequently occur near psychological levels, sometimes called "found numbers". An example would be when the Euro trades near 1.15. That level is clean and neat, making it likely to be more important than 1.14 or 1.16.

One way to trade off these levels of support and resistance is to buy when a price is about to hit a support level, and to sell when a price is about to hit a resistance level. The reason behind this is that prices often "bounce" off the support and resistance levels since the price can't break through.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.