Chart school · lesson 6 of 10

Support and resistance: levels, role reversal and round numbers

A level is a price where the market has turned before. Traders remember such prices, and that memory is the only thing that gives a level its weight.

The 5 drawings Check yourself

The idea

Support is a price where a fall has stopped more than once. Resistance is a price where a rise has stopped more than once. Neither is a physical barrier. Each is a record of past turning points.

Levels matter because many people watch the same ones and place orders near them. That makes behaviour around a level worth observing. It does not make the level hold.

6.1

Support

What it shows: A price, or a narrow band of prices, where falls have stopped and turned. The more separate times it has turned the price, the more people are watching it.
How traders use it: Buyers have been willing to buy there before. Traders watch what the price does when it returns: a firm rejection, a slow drift through, or a clean break.
A common mistake: Treating support as a floor. Every level that has ever broken had held before. Each new test is a new contest, and a level that is tested again and again in quick succession is often weakening.

Support, in the glossary

6.2

Resistance

What it shows: The mirror of support: a price, or a narrow band, where rises have stopped and turned.
How traders use it: Sellers have been willing to sell there before. As with support, traders watch the behaviour at the level, not the level alone.
A common mistake: Selling simply because the price has reached resistance. In an uptrend, resistance levels are broken one after another; that is what an uptrend is.

Resistance, in the glossary

6.3

Role reversal

What it shows: A resistance level is broken, and when the price later comes back to it from above, it holds as support. The same happens the other way round: broken support often becomes resistance.
How traders use it: The price that sellers defended is now one that buyers defend. Traders pay particular attention to the first return to a broken level.
A common mistake: The return does not always come, and when it does it does not always hold. A level that fails on the retest tells you the break was not accepted.

Support and resistance, in Chart school

6.4

Round numbers

What it shows: Prices that end in zeros. People think and place orders in round figures, so orders collect at them. These are sometimes called psychological levels.
How traders use it: Traders expect more activity near a large round number: hesitation, a sharp rejection or a fast move through. It is a place to pay attention, with no direction implied.
A common mistake: Placing an order exactly on the round number, where everyone else's order is. The price frequently turns just short of it or pushes just through it before turning.

6.5

A level is a zone

What it shows: Turning points rarely fall on exactly the same price. They cluster in a band. Support and resistance are better drawn as zones a little wide than as hairlines.
How traders use it: Traders allow for the price to enter the zone, and even pass slightly beyond it, before deciding that the level has held or failed.
A common mistake: Expecting precision to the last decimal. A stop placed exactly on a line is placed where a brief spike can reach it, and wicks through levels are ordinary.

A stop hit by a wick, in the Playbook

SimulationEvery drawing is invented to show a shape as plainly as possible. None of them is a market, and a real chart is rarely this tidy. Educational information, not investment advice or a recommendation to trade.

To carry away

Lesson 6, in four lines.

01
Support is where falls have stopped. Resistance is where rises have stopped.
02
A broken level often changes role: old resistance becomes support, and the reverse.
03
Round numbers attract orders, and so attract attention.
04
A level is a zone. No level is guaranteed to hold; every broken level held before it broke.

Check yourself

Three questions on this lesson.

Choose an answer and press Check. You can try each as often as you like. No answer is stored, nothing is sent anywhere and no score is kept.

Question 1 of 3
What is a support level?
A price below which the market cannot fallA price where falls have stopped and turned beforeThe lowest price of the day
Question 2 of 3
Resistance is broken and the price later returns to it from above. What often happens?
The level disappearsThe level becomes resistance again at onceThe level acts as support
Question 3 of 3
Why are support and resistance better drawn as zones?
Turning points cluster in a band, seldom on one exact priceZones are easier to seePlatforms cannot draw thin lines

An explanation for study. It is not advice, a recommendation or a forecast. No pattern is reliable on its own, and a shape described here says nothing certain about what a price will do next.

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose.

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The idea of this lesson

Lesson 6, in four lines.

Three questions on this lesson.

The idea of this lesson

Lesson 6, in four lines.

Three questions on this lesson.