It’s axiomatic within the forex trading market that, once broken, support tends to become resistance. What isn’t as clear is why this phenomenon occurs.

(This article, for the sake of simplicity, will deal with the question asked in the title. It can simply be assumed that the opposite, resistance becoming support, works in the same manner.)

Examine the chart below. This is the fifteen-minute chart of the AUD/JPY from 2 to 3 September 2008:

In this example, the historically important level of 90.25 (marked by the horizontal green line in the middle of the chart) was respected as a support level on 26–27 August for almost eight hours, then it gave way and the price punched through. The price fell briefly, rallied back to test 90.25 as a resistance level, then, although this is not shown on the chart above, the price continued to drop and is currently close to historic lows around 55.00.

A support level for a declining currency pair is formed when a sufficient number of forex traders enter the market long. Perhaps these traders have observed some indication on technical charts that points to a short-term bounce, as in the case above. Perhaps some piece of fundamental data is released that is briefly supportive of the depreciating currency in the pair. However, for whatever reason, traders make their purchases, and the decline halts and the price rises as a direct result.

When the price rises, the traders are rewarded for their purchase by an immediate, short-term profit. It’s an easy trade and easy money, and the motivation of greed is there to encourage these traders to repeat the process. When the price approaches that level for a second time, sufficient numbers of forex traders again purchase the pair for it to bounce again, and although it doesn’t earn as much profit this second round it does haul enough pips home for at least some of these traders to be willing to purchase AUD/JPY when it approaches the 90.25 level for the third and fourth times.

But the fourth time the currency pair reaches that level, something happens. It doesn’t receive sufficient purchasing support from buyers and therefore instead of bouncing from support, it slams through it and the price declines fairly strongly. Those traders who went long AUD/JPY for this fourth time are now on the wrong side of the trade and going down fast.

Risk management at this point dictates these traders should exit their losing positions and look around for another, hopefully profitable trade. Human nature, on the other hand, often encourages traders to hold a losing position for a while in the hope the price may rise back to their entry point. In the case of this volatile market, that’s what happened, and these traders, probably with a sensation of relief, closed their long positions when the price approached the 90.25 level from below—causing sufficient selling pressure to lower the price again, respecting the previous support level as a resistance level and, incidentally, beginning the process anew from the opposite direction.