Key points

Support and resistance should be thought of more as general price levels rather than precise price points. For example, if a currency pair makes a low of 1.4560, rallies slightly, declines again to 1.4560, then rallies again, a subsequent move down to 1.4557 doesn’t violate the “support level” of 1.4560. In this case, the fact price retraced once to the exact price level it established before is more of a coincidence than anything else.

Price must move through a support or resistance level by a significant amount, or stay above or below it for a significant amount of time (or both) before that level can be considered violated. What constitutes a “significant” move will depend on the market’s volatility or how defined the support or resistance level is. For example, if a market has twice pushed above a resistance level by 15 to 20 pips and then moved back below the level, a third move of 24 pips above it is not necessarily a definitive breakout because it’s similar in magnitude as the previous moves. One way to define a valid penetration of a resistance or support line is to look for a certain number (i.e., two or three) of consecutive closes (or lows or highs) above or below the level in question. You also can look for valid short-term breakouts by placing them in the context of the next longer timeframe. For example, if the market breaks through and closes above resistance on a weekly chart, you can use that level as a support level for short-term trading based on daily or intraday bars. If the market fails to break through such resistance, the level could still be used as resistance on the shorter time frames.

One frequently referenced aspect of support and resistance is that former resistance often becomes future support, and vice versa. For example, the April 15-17 resistance level at the top of the small consolidation functioned as approximate support on April 19 and 20. (However, notice the resistance level of the slightly larger consolidation that began on April 13 did not seem to form a support level for the subsequent consolidation.) The multi-month support level defined by the 2001, 2002, and 2003 lows appeared to become resistance after the market broke below it and then rallied to just under it in May 2004.