Updated 12th August 2014
Support and resistance is one of the most widely used concepts in trading. Strangely enough, everyone seems to have their own idea on how you should measure support and resistance.
Let's take a look at the basics first.
Look at the diagram below. As you can see, this zigzag pattern is making its way up (bull market). When the 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 market oscillates over time. The reverse is true for the downtrend.
As you can see, this zigzag pattern is making its way up (bull market). When the 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 market oscillates over time. The reverse is true for the downtrend.

How are supports and resistances used for trading ? Several ways:

- Pull back trading. On each pullback from a newer high and low for example for long trades and the converse for shorts.
- Support or resistance break. When price crosses the boundaries of the supports and resistances, these levels are said to breached and its possible to trade these breakouts.

Supports and resistance trading needs to be combined with view of the larger market to be effective. These remain the most effective and powerful methods for successful trading.

Improperly used, the use of this approach can cause a serious dent in your trading account. Read more about these in the separate subsection for this concept.
Read more: http://www.babypips.com/school/support-and-resistance.html#ixzz1bxlk5CJm