Support levels represent ‘floors’ - areas where buying tends to be strong. If the price falls to a strong support, then sellers in the market are less keen to sell at a cheaper price and buyers are happy to buy at that attractively low level. This drives the price up, or at least stops it from falling any lower. By knowing the support levels, you can identify good buying opportunities, because that’s where buyers are supposed to be strong and push the price up. However, if the price falls below a support level, this is also a trade signal. It shows that sellers are still stronger than buyers, and may prompt buyers to close their trades and more traders to sell even more of the traded security. The next chart shows EUR/USD repeatedly finding support at 1.4000 between June and September, finally breaking below in September, and dropping even lower after that.

Resistance levels are the opposite of support levels, as they can act as a ‘ceiling’ to rallies. If the price rises to a strong resistance level, chances are that buyers might be reluctant to buy at these high prices, whereas sellers are more comfortable to sell as they consider their entry price a good one. This dynamic tends to drive the price down, or at least keep it from moving higher. By knowing the resistance levels you can recognize possible selling opportunities. The reason support and resistance levels exist is because markets remember prices where buyers or sellers tend to cluster. For example, if EUR/USD rises to 1.5000 and then reverses lower, the next time it reaches that price, the market will remember what happened last time, and buyers and sellers will begin positioning themselves for another reversal both knowing what happened last time at 1.5000.

More to Learn:

-The more times a support or resistance level has been touched and confirmed, the stronger it is considered to be. As a general rule of thumb, a price level is considered as a support or resistance if it has been tested at least three times. Exceptions can be around numbers such as EUR/USD 1.5000, 1.4900, 1, 2000 etc. or OILUSD $100, $200 etc. which are considered psychological supports and resistances. 

-Support and resistance levels found on longer-term time frames are considered stronger and more significant. Start by analyzing long-term charts and then move to shorter-term charts. 

-If you are trading in the direction of a trend and that trend approaches a resistance or support, a good idea would be to tighten your stop loss to protect your profits in case the price reverses against your trade. 

-Once a support level is broken in a downtrend, it often turns into a resistance level in an uptrend (and vice-versa)