Resistance and support Levels

When the price movement of a currency pair changes direction and begin to move in the opposite direction, the level at which it changes direction is called a resistance or support level.  Resistance levels occur when the price is initially moving up and then reverses to move down, while support levels occur when the price was initially moving down and then starts to move up.

These levels are important since they show a price point that the market as a whole is reluctant to break through and so it becomes more likely that when the price reaches that point again there is a much higher probability it will not break through again.   As a result they many traders use them to make trading decisions

Once a resistance level is broken, that level can potentially become a support level.

So support levels support the price from falling further and resistance levels create resistance for the price to move higher.  It should be noted that resistance and support levels are not specific price points but more like a general areas of resistance or support.

Trend lines and trend channels.

Support or resistance lines can also be drawn diagonally and are known as trend lines.  By drawing a line from one major peak or valley bottom to the next, a trend line is formed.  As the name suggests, trend lines are used to spot trends.

If the trend line is drawn by connecting major peaks then by drawing a second parallel line on the major valleys a trend channel is formed

The image below is from todays (June 15 2011) EURUSD chart.  It shows resistance and support levels drawn in blue, two different trend channels made from four trend lines.  Notice that trend lines have to be parallel to make a trend channel.

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