Support and resistance are proven areas where buyers and sellers find some of equilibrium, they are major turning points in the market.
Support and resistance levels are formed when price reverses and change direction, and price will often respect these support and resistance levels, in other words, they tend to contain price movement until of course price breaks through them.
In trending markets, support and resistance are formed from swing points. in an uptrend the previous swing point acts as a support level, and in a downtrend the old swing point acts as a resistance level.
See the example below to learn more:
The illustration above shows how the previous swing point acts as a support level after the breakout.
When the market makes the retracement move it respects the previous swing point (support level) which will represent the beginning of another impulsive move.
As you can see, when the market tests the previous swing point (support level) it goes up again.
By drawing a support level in an uptrend market, we can predict when the next impulsive move will take place.
Let’s see another example of a downtrend market.
The illustration above shows us how the market respects resistance levels, when price approach the previous swing point, (resistance level).
The market makes an impulsive move. If you understand how price action act in a trending market, you will predict with high accuracy when the next impulsive move will begin.
Another way to catch the beginning of an impulsive move is by drawing trend lines.
This is another technical skill that you have to learn if you want to identify key linear support and resistance level.
Let me explain you first what do trend lines mean?
Quite often when the market is on the move making new swing highs and lows, price will tend to respect a linear level which is identified as a trend line.
Bullish markets will tend to create a linear support level, and bearish markets will form a linear resistance level.