Support and resistance is one of the most widely used concepts in trading. The concepts are undoubtedly two of the most highly discussed attributes of technical analysis and they are often regarded as a subject that is complex by those who are just learning to trade. Support and resistance trading is considered to be one of the most effective ways of Forex trading since it is based on the primary source of information -market price itself.
Forex Support Levels – Areas which price cannot seem to break below. If a break does happen, this is only temporary and the price will soon return above the level.
Forex Resistance Levels – Areas which prevent the price from rising further. These levels act like a ceiling and appear to force price back down when it tries to break above the level.
As you can see from the picture, the graph is making its way up (bull market). When the market moves up and then pulls back, the highest point reached before it pulled back is now resistance. Resistance level means that upon approaching it from below the price is expected to stop (temporarily or permanently) forced by Sellers’ pressure to move back lower again.
As the market continues up again, the lowest point reached before it started back is now support. In this way resistance and support are continually formed as the market oscillates over time. The reverse is true for the downtrend. Support level means that upon reaching certain price the market is expected to find a new push from Buyers, who will try to drive price up.
Support & Resistance in Forex
Once price reaches certain level at which some market reaction (price stop, price reversal etc) was seen in the past, it tends to produce certain reaction again. If traders are able to correctly anticipate this reaction, they will be able to benefit from market activity when price reaches support and resistance levels. Support and resistance are among the most widely known and widely used Forex trading concepts and strategies in the Forex market. It is essential to keep in mind that the support and resistance levels are not really exact numbers. Sometimes support or resistance levels may appear to be broken however it soon becomes apparent that the market was just testing it. Candlestick charts(?) present shadows which represent these support and resistance levels. Support and resistance levels are usually regarded as broken if the market actually closes past that specific level.
Identifying support and resistance levels
Several most commonly used methods and studies that help to identify support and resistance areas:
- price patterns
Price moves in waves. The points where price stops and reverses, creating a wave is a natural support or resistance level. (Support – for all price activity which happens above the mentioned level, resistance – for all activity happening below that level).
- trend lines
These lines are the natural ways to determine the intensity of a trending market and find the slope it travels with either up or down. Trend line represents support and resistance level as it extends in the future.
- moving averages
certain moving averages are believed to have an impact on the market price when it reaches or trades near them. To such Moving averages belong EMA 200, EMA 100, EMA 50 and EMA 20.
- pivot points
one of the fundamental ways to look for important support and resistance points during the trading session.Pivot points is a separate study, which calculates price support and resistance points based on previous period activity.
- fibonacci levels
another famous study with a goal to identify price turning points. There are many resources about Fibonacci trading available on the net.
How to effectively use support and resistance trading?
The key point is to identify the most valuable support / resistance levels for every Forex chart you traded. There is probably no special recipe on how to do that, the key is to learn and understand at least 5 basic studies mentioned above and then look for certain patterns and clues on the chart.
The most important and at the same time simple rule is to not make things complicated. Everything a trader sees on the chart should be interpreted at a glance without any hidden meanings. Some traders even base their trading purely on the price charts without a help of any additional indicators. They use trend lines and price waves to make decisions about price future behavior.
Support and Resistance, bear in mind
- When the price passes through resistance, that resistance could potentially become support.
- The more often price tests a level of resistance or support without breaking it, the stronger the area of resistance or support is.
- When a support or resistance level breaks, the strength of the follow-through move depends on how strongly the broken support or resistance had been holding.
- Breaking the support and resistance levels isn’t an exact math. False breakouts are possible.
- Real breakouts are usually marked with a bar closed below/above the support and resistance level.
Forex traders use support and resistance levels to assist them understand market trends and to take full advantage of their profit potential whilst minimizing their risks. The support and resistance levels are just two of the numerous tools that are available to Forex traders to assist them understand the Forex market.