Some have asked how important is support and resistance (S/R) lines in technical analysis. For me S/R lines are even more important than trend lines, it is one of the first things I look at when looking at a chart. It should be noted that drawing a S/R line is a bit of an art, as often a crayon is better than a fine pen. Often small volume spikes can confuse your view. This causes some to only use closing or open prices when drawing them. I personally just use the crayon method.

First we should understand the phycology behind the principle. The best way to explain the principle is to think about your own feelings. If you have ever been to an auction that sells antique furniture you see this principle in play – for example you would like to buy chairs. You first have an idea what you are willing to pay. So you enter the auction and you may see several chairs go for a high of lets say $50. So you analyse that anything under $50 you think it is a bargin and will start bidding more aggressively if it is signifcantly below $50  - once the $50 price is reached you back off.  This is the line of price resistance – other players in the aution will notice the same thing. However you begin to notice more people have come to the auction and the price starts getting riduclous and gets bid up to $100. You notice that now with these new bidders the prices are always well over the $50 and if you really want a chair you wil need to pay. Once the price gets back or close to $50 you get excited and bid more aggressively because you now think you are getting a bargin and is close to the price you were originally willing to pay. This is a line of price support.

In this example you see at first the $50 was a resistance area where price do not go higher – then it becomes a support area where people will get aggressive to buy. Hence this is why technical analyst commonly say; resistance becomes support. . The longer the price stays at a given area the more people will think it is fair value. This effect in a way gives the market memory as these phycological dynamics play out in the market. Some may say that its merely a chart pattern and has no real phycology, but nothing could be futher from the truth. Obviously the inverse for a bull or bear situation is true. To trade this, often one will wait for the break of a resistance line, let the price advance, whereby you wait for the price to return to (or close to) the orginal resistance area which is now a support break are,a to buy for a return back up over the support area. Keep in mind, if the price keeps hitting this support area it maybe ready to break down – often third or fourth time to the support area its a break down situation – it is the same for resistance areas.