Support and Resistance is a key concept in technical analysis . Traders keep a close eye on them to identify important areas on the chart that can provide high probability trades.
You must always remember that technical analysis , including support and resistance is not a perfect science. And you should treat it that way to be able to use it correctly. Understanding the limitations of technical analysis and trading will actually give you a psychological edge, because you will know that you will have losses and accept them. Also, that's why support and resistance or any other technical concept should be used in conjunction with other technical tools.
What are Horizontal Support and Resistance Levels
Support and resistance are levels where the price tends to stop and reverse direction.
Resistance is a level above the price, where supply gets strong enough to exceed demand, forcing the price to move back lower.
Support is a level below the price. where demand gets strong enough to exceed supply, Forcing the price to move back higher.
Resistance usually turns to support when a breakout happens as illustrated on the chart above. The opposite is true, when a breakout below support materializes, the support usually turns into resistance.
As you illustrated on the chart below, the price broke above the main resistance, then headed back to touch the broken resistance before heading higher again. (The is called a "Retest" In technical analysis jargon. it's simply when a price head back towards a broken support or resistance level ).
How to Identify Horizontal Support and Resistance Levels
In markets, the price moves in trends. Either up,down, or sideways. An uptrend has a structure of higher highs and higher lows. While a downtrend has a structure of lower highs and lower lows. It is compulsory that you know how to spot those highs and low as they are levels where the price reverses direction. Therefore, they are simply support and resistance levels.
In an uptrend structure, the price forms higher highs and higher lows, those swing highs and lows are potential support and resistance levels. The same concept applies to a downtrend structure.
Tip: The latest swing low in the uptrend structure (blue arrow) is a very important support. This is because a breakout below this low shall invalidate the trend structure( higher highs and higher lower), to establish a new lower low.
Real-life examples
Example One : Support and Resistance in an up-trending market
In the image above, starting from the left side of the chart
1. The price recorded a major low at 35.22 before heading higher. As the price found demand that exceeded supply. Forming a swing low and accordingly a support at 35.22.
2. At 42.39, the price reversed to the downside as supply exceeded demand, forming a major swing high and resistance level .
3. The price established a major low and support at 37.59.
4. The price headed higher and completed a breakout above the latest resistance at 42.39. Accordingly, resistance turned now into a support level .
5. The price established a new minor swing high at 44 .47 and headed back lower.
6. The price found demand at the previously broken resistance, which turned now into support.
7. Another move higher and a breakout above latest resistance at 44 .47.
8. A new major swing high at 46.76 and accordingly a new major resistance at 46.76.
9. The price headed lower to break back below broken resistance-turned-support at 44 .47.
10. The price established a new minor swing low and support level at 43.20.