Why Support and Resistance Exist
Support is a price level where buying tends to overwhelm selling, halting declines. Resistance is the inverse. These levels exist because participants have memory: traders who bought near a prior low buy again when price returns. The reflex is mechanical.
Five Rules
Rule 1: At least two touches. A single low is not a support. Two pivot lows at similar prices form a tentative level; three or more confirm it.
Rule 2: Use bodies, not wicks. Closing prices represent what the market accepted. Draw using the cluster of closes — wicks can extend through it.
Rule 3: Levels are zones, not lines. Use a thin band. Width should reflect asset volatility — a few percent for stocks, tighter for bonds and FX.
Rule 4: Higher timeframes dominate. A daily support beats a 1-hour support. Always check weekly for major levels before trading shorter timeframes.
Rule 5: Volume validates. Levels formed on high volume are more durable. A 52-week low with 3x average volume is stronger than a holiday-session low.
Role Reversal
When support breaks, it often becomes resistance on the way back up. Traders who bought at the old support are now underwater; many sell to break even when price returns, providing new resistance. Same logic inverted.
Using Levels
(1) Buy near support with stops below; sell near resistance with stops above. (2) Never put a stop in the obvious zone — buffer it slightly beyond. (3) Take-profit at the next major level in the trend direction.
Common Mistakes
Drawing too many levels until every bar touches one. Treating one-touch wicks as support. Using levels from years ago on intraday charts. Ignoring higher-timeframe context.