As pointed out on a page in the BabyPips School, it is the conventional wisdom that a level of resistance (supply) may become a level of resistance (demand) at some point in the future. What is the logic behind this?
Why might an area of supply become an area of demand?
There’s probably a few main reasons. Firstly it offers a known area where traders can expect there to be other players active in the market - many traders would prefer to enter the fray where they think they’ll be joined by others pushing the same trade as them.
Secondly it marks a sort of territorial line in the sand. If for example sellers were trying to push the price down and were having a hard time chopping through some support before eventually pushing through they’re not going to want that level to be breached and become support again. As such they’re more likely to pile back in to make sure that price doesn’t go back up above that level and as a result it becomes resistance this time around.
Thirdly in the example above some of those who were long protecting that support area will be in a loss trade once the support level was broken. If the price retraces back up to that around that level it’s likely that some of them would look to cash out at breakeven which adds to the selling and can help cap the price.
Hi. S & R levels are just prices where there are buyers and sellers. Then traders look where price has reacted from in the past, and look to buy and sell from there. It’s a bit like a self fulfilling prophecy i guess?