The most basic concept in technical analysis is that of support and resistance. Traders who misunderstand this concept and its multiple applications will have a difficult time in the forex trading market, and it’s worth the occasional review.

Support is the floor of a price channel, the price a currency pair demonstrates difficulty falling beneath. This is because traders have placed entry orders and stop losses at or just below this point. The market hits the support level, triggers the orders, and the increased demand raises the currency pair’s price back above that point. As a rule of thumb, the more times a currency pair bounces off support, the stronger it tends to become.

Resistance is the opposite; it is the ceiling of a price channel and the price a currency pair has difficulty rising above, due to a congregation of sell orders and stop losses at a certain point. Multiple use also strengthens resistance levels.

Another rule of thumb says that when a currency pair breaks from a range, the broken line tends to become the opposite: if the price falls below support, that tends to become its new resistance level, whereas a broken resistance tends to become the new support.

Support and resistance do not have to be horizontal lines; often they are slanted, reflecting an uptrend or downtrend. No matter their angle, they function in the same manner.

There is no single correct method of drawing support and resistance lines. Some traders lop off the upper and lower wicks of candlesticks; others add in a few extra pips to make certain they enclose the entire range for maximum profits in trading, creating support and resistance “zones” rather than points.

For the majority of the time, currency pairs are rangebound, moving regularly between support and resistance levels. The simplest forex trading technique, therefore, is to trade these levels, buying a currency pair when it reaches support and selling when it reaches resistance. The profits made are not enormous but are generally steady.

Other traders, however, prefer waiting for the heady moves a currency pair makes after it breaks free from a range. These traders place entry orders outside the price channel, to buy when the currency pair rises above its resistance level or sell when it falls below support.

How one uses support and resistance lines should in part depend upon which currency pair is being traded, as not all of them demonstrate the same measure of respect. Due to the thousands of candlestick forex traders in Japan, for example, many of whom use the same analytical methods, the USD/JPY hits a large number of orders at technical levels and for that reason often turns there (demonstrating the value of mass psychology in technical analysis). Therefore, support and resistance levels can be entered fairly tightly for this currency pair.

The GBP/USD, on the other hand, seems to have a perverse personality of its own and tends to slam through support and resistance levels as if taking aim at the orders awaiting it. After it signals a breakout of the price channel and lures all the momentum traders into the market, it often reverses course, leading to sizable losses, all in the name of the game.