The concepts of support and resistance are undoubtedly two of the most highly discussed attributes of technical analysis. Part of analysing chart of pattern, these terms are used by traders to refer to price levels in charts that tend to act as barriers, preventing the price of an asset from getting pushed in a certain direction. At first, the explanation and idea behind identifying these levels seems easy, but as you'll find out, support and resistance can come in various forms, and the concept is more difficult to master than it first appears.
Support is a price level where a downtrend can be expected to pause due to a concentration of demand. As the price of a currency drops, demand for the currency increases, thus forming the support line. Meanwhile, resistance zones arise due to sell off when prices increase.
Once an area or "zone" of support or resistance has been identified, it provides valuable potential trade entry or exit points. This is because, as a price reaches a point of support or resistance, it will do one of two things – bounce back away from the support or resistance level, or violate the price level and continue in its direction – until it hits the next support or resistance level.
Most forms of trades are based on the belief that support and resistance zones will not be broken. Whether price is halted by the support or resistance level, or it breaks through, traders can "bet" on the direction and can quickly determine if they are correct. If the price moves in the wrong direction, the position can be closed at a small loss. If the price moves in the right direction, however, the move may be substantial.
This tool is useful to use combing with Portfolio Hedge Pairs Trading System to make Entry/Exit points.