The price action trader pays particular attention to pivotal price levels, often “drawing” these lines horizontally as levels. The theory behind employing these lines is that the market has a sort of memory: price behaves with respect to certain levels that have previously been significant
turning points in the historical narrative of the price’s action, and other market participants are likely to also be trading with consideration for these levels.
When the levels are below the current price, they constitute “Support,” a potential buffer against movement; when the levels are above the
current price, they appear as “Resistance,” a potential barrier to movement. As price comes close to these levels, traders often wait until the levels have been tested and either broken or defended before they are confident enough in the direction of price’s movement to enter into a trade.
As price moves through one of these levels, they convert into the opposite role –when pierced by an uptrend, a becomes a , indicating a significant level at which buyers successfully drove price up beyond a level previously guarded by sellers.
In general, price action traders buy at Support and sell at Resistance, relying on these previously-tested levels to make safer bets on the future behavior of price. Most significant levels are those closest to current price level, as they are the most likely to be taken into consideration in the immediate developments of price movement – some traders will only draw in the nearest reliable level of to simplify their charts.