Support and resistance is one of the most widely used concepts in forex trading. Every trader seems to have his own idea on how you should draw forex support and resistance.
Let’s take a look at the basics first.
Look at the diagram above. As you can see, this zigzag pattern is making its way up (bull market). When the forex market moves up and then pulls back, the highest point reached before it pulled back is now resistance.
As the market continues up again, the lowest point reached before it started back is now support. In this way, resistance and support are continually formed as the forex market oscillates over time. The reverse is true for the downtrend.
One thing to remember is that support and resistance levels are not exact numbers.
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Often times you will see a support or resistance level that appears broken, but soon after find out that the market was just testing it. With candlestick charts, these “tests” of support and resistance are usually represented by the candlestick shadows.
Notice how the shadows of the candles tested the 1.4700 support level. At those times it seemed like the market was “breaking” support. In hindsight we can see that the market was merely testing that level.
So how do we truly know if support and resistance was broken?
There is no definite answer to this question. Some argue that a support or resistance level is broken if the market can actually close past that level. However, you will find that this is not always the case. Read more: http://www.babypips.com/school/elementary/support-and-resistance-levels/support-and-resistance.html