Downward prices often find a level where they have great difficulty going any lower. In forex jargon, this level is called support. Conversely, upward prices frequently reach a level where repeated attempts fail to move prices beyond that level. This is called resistance.

Most indicators are some variation or other on the concept of support and resistance. Some are very simple and some have complex mathematical formulas underlying them. It’s somewhat ironic that the simple indicators sometimes out-perform the complex ones, but when one is found that seems to be effective the majority of the time, it really doesn’t matter whether it can be understood by a three-year old or iwhether t requires an advanced degree in mathematics. The indicator that makes you the most money or prevents you from losing money is the best one. It is simply a matter of experimentation to determine the most suitable ones. There are many effective indicators.

There is something known as the 80/20 rule, that applied to forex price movement, claims that markets spend 80% of the time trading horizontally or sideways in a narrow range and 20% of the time changing that range. Unfortunately, these 80% and 20% times seldom occur consecutively. In a six-hour trading session, for example, the 80% of sideways price activity is not going to be the first four hours and 48 minutes (360 minutes times 80%) of the session, followed by 20% (72 minutes times 20%) of trending prices. If this were the case, we’d all be rich and you wouldn’t need to read this.

When markets are moving mainly horizontally, this is referred to as a “trading” market. In these instances support and resistance would be depicted by horizontal lines.

When prices are moving up or down, this is referred to as a “trending” market. Diagonal lines of various slope will determine support and resistance prices. The steeper this sloping line is, the stronger the probability that prices will continue in the same direction.

Trading platforms allow for drawing support and resistance lines on the chart. Simply connect at least two recent lows to determine support. Connect two or more highs to locate resistance. The more lows or highs that can be connected in this manner, the better the indicator becomes at identifying the “strength” of the support or resistance.

Regardless of how many price points can be joined by a support or resistance line, there are some additional critical considerations.

The first of these is that support and resistance are not truly thin lines but have a range to them. The analogy frequently used compares support to a floor and resistance to a ceiling.

Just as the floor of a building has a space below it and the ceiling beneath and another space between the ceiling and the floor above, support and resistance have thickness or depth.

Some trading platforms permit adjusting the thickness of drawn lines to accommodate this. On other platforms, it may be necessary to add a second line to visualize the actual range of support and resistance.

How thick to make the lines can be determined by taking a recent series of price bars or candles, ten perhaps, discard the largest and smallest and arrive at an average for the remaining eight. It is not essential to get exact numbers for the price bars. It can be done visually with adequate accuracy.

In a market where prices are making big moves, support or resistance lines can be quite thick. In a quiet market, they will be thin.

The benefit of giving thickness to support and resistance levels is that it can prevent the false appearance that support or resistance has been broken and cause a trade to be entered prematurely.

Another critical element in applying support and resistance levels to consider is the necessity of examining charts in multiple time frames. What appears to be a clear example of resistance being penetrated on a one minute chart might turn out to reveal the presence of very strong resistance on a 30 minute chart. The exact opposite is true for cases where support has apparently been broken on the shorter time frame charts as compared to longer time frame charts.

In a sideways market, the sounder trading strategy is to sell resistance and buy support.

In an upward trending market, lean toward buying after a pullback from the recent highs. In a downward trending market, selling when the market pauses or retraces its downward movement slightly is the preferable tactic.

The one time these tactics might be disregarded is when a trade of very short time duration with a small profit potential is desired. This is referred to as “counter-trend” trading or “scalping.” This type of trading is exciting when you’re right, but deadly when you’re wrong. Keep it to a minimum if you want to stay around to trade again.

There is an interesting aspect to support and resistance that you might find advantageous. When resistance is broken to the upside, prices rise for a while, then often come back to the previous resistance level before resuming an upward trend. Old resistance has now become new support. This provides as near to an ideal long entry point as you’re likely to see. The opposite is true for broken support: downward trending prices return to the old support, which has become the new resistance, supplying an optimal short entry opportunity.

Support and resistance is not accurate 100% of the time. It may sound cynical, but they are always infallible when you are just observing the markets. When you actually go long anticipating a bounce off support or a break of resistance, or go short looking for a bounce off resistance or a break of support, either of them is likely to choose that particular moment in time to fail.