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Support and Resistance levels (page 1)

One use of technical analysis is to derive "support" and "resistance" levels. The underlying idea is that the market will tend to trade above its support levels and below its resistance levels. A support level indicates a specific price level that the currency will have difficulties crossing below. If the price repeatedly fails to move below this particular point, a straight line pattern will appear.

Resistance levels on the other hand, indicates a specific price level that the currency will have difficulties crossing above. Recurring failure for the price to move above this point will produce a straight line pattern.

If a support or resistance level is broken, the market is then expected to follow through in that direction. These levels are determined through analysis of the chart and by assessment of where the market has encountered unbroken support or resistance in the past.

Support can be defined as the level from which prices have fallen to, made a dip in the market and then retraced. The reverse is true of resistance levels where price have risen to, made a peak before retracing back to the downside. The more often retracements happen at or around key levels the stronger the support or resistance level becomes.

In psychological terms these levels work because buyers or sellers remember that there was a sharp reaction from the same level last time it was seen. Therefore, at a support level sellers are tempted to take profits, new sellers are reluctant to take positions and buyers are keen to enter the market.

A support is a price level which is deemed attractive by buyers of that currency, therefore preventing sellers from lowering the price below it. A support level is usually identified once the market tests that level more than once before breaking below it (broken support) or moving up and away from it (maintained support). A recurring failure by the market price to move below the support level usually results in a pattern that can be traced by a straight line.