The terms support and resistance levels are synonymous with supply and demand.
Support level is formed at the price, at which there is sufficient demand to halt the decline in prices. Resistance level is formed at the price, at which there are a lot of sellers, who prevent rising prices above resistance level. In case of breakthrough support level or resistance level there may be turn over, which means that on the same level support level transforms into resistance level or vice versa.
Why support and resistance levels forms?
Support and resistance levels are an important factor in the psychology of the market. Transactions in financial instruments concluded between people, which are common to certain patterns of behavior. In the addition to behavioral patterns, people are superstitious and have their lucky and unlucky numbers, changing moods depending on weather,… All this is reflected on their decisions about purchase and sale.
Support and resistance levels can be called psychological boundaries. Typical of such boundaries are round numbers like 10, 20, 35, 50, 100, 1000. If the price falls to levels which are close to psychological limit of 50 units, on the market began to dominate the sells and that creates the support level.
How to use knowledge about support and resistance levels?
Support or resistance levels are used to test the long term trend. In the event that those levels abstain, the long term trend is confirmed, otherwise there can be a turn over in long term trend and we can take advantage of this.