This is a widely used strategy for trading various kinds of financial instruments such as currency pairs and stocks. The support and resistance points are defined by the highs and lows of a certain financial instrument over a specific period of time; during this period, the trader can see how the price is bouncing back and forth between these points until the price breaks through either benchmark.
This strategy is also known as floors and ceilings. The floors or the support levels are made of repetitive lows. Support is a price level in which there is a strong enough demand that prevents the price from going down further. For instance, in a candlestick chart, the support level would be set when there is a relatively straight line for the lows in which no other low outbreaks the line.
The support in a support and resistance strategy
On the other hand, there are ceilings or resistance levels. These resistance levels are made of repetitive highs in which no other high outbreaks the price in a certain period of time. The logic behind this is that it is a price level at which there is a strong level of supply that prevents the price from rising.
The resistance in a support and resistance strategy
There is a curious phenomenon that occurs with floors and ceilings in which they switch roles. This means that when a ceiling is breached by the price, that value that used to be ceiling, could eventually turn into a floor. Same with floors that, once breached, they can end up switching their role and acting as ceilings. This phenomenon is something traders could take into account when trading with this strategy.
The support and resistance strategies are based on the principles of demand and supply, which controls the fluctuations of the prices of financial instruments. It is important to take into account that since this is a very commonly used strategy, it is very weak if used by itself to trade. This is due to the fact that many large institutions know that many people use support and resistance and it is very easy for these institutions to manipulate and push prices just a little bit beyond the support or resistance levels to trick people and wipe them out.