Forex Support and Resistance Explained
What is Support and Resistance in Forex? One of the common business clichés that are heard commonly is ‘purchase low and sell high’. However, the most important question is that how low should be considered low and how high should be considered high. One way, traders can qualify the levels is by considering those areas where the price stops and changes direction. Support and resistance are the levels where the price stops and changes direction.
Support and resistance can be considered as a widely used concept in the Forex trading. Interestingly, there are many who have different ideas on how support and resistance in Forex should be measured. The basics of support and resistance are actually simple. The FX market goes up and pulls back after that. The highest stage or point reached just before it is pulled down is the now “resistance”. Similarly, as the market starts to rise again, the lowest stage or point reached just before it rose back is the now “support”.
Plotting Resistance and Support
You should always remember that the levels of Forex support and resistance are not actually exact numbers. Most of the times, you will find a level of resistance and support appears to be broken. However, if you have been trading for some time, you will agree that this is how the market often tests it.
Trading Support and Resistance
Trading resistance and support can be divided into the following 2 simple ideas:
The Bounce: Instead of setting orders on resistance and support levels directly, a trader can trade the levels of resistance and support just after the price bounce.
The Break: A trader can set orders when the levels of support and resistance break.
Why do Resistance and Support Happen
One of the main reasons behind this behavior of prices is the market psychology and demand and supply. At the levels of support, the total buyers usually exceed the total sellers and help the price rise up. Similarly, at the levels of resistance, the total sellers exceed the total buyers, which contribute to the downfall of the price. This keeps occurring often in one range until the information of new material is made available, which then helps in shifting that price to one new range. In this case, a new resistance and support would be made or established.
As soon as the level of a support and resistance is breached or in filtered, the support and resistance roles also flip. Further, when the price goes down a certain level of a support, that same level of support becomes the new level of resistance. Similarly, when the price rises above the level of a resistance, that same level of resistance will become the new level of support. This reversal of role generally occurs only when a strong or sound price, which is moved, has shifted that price to one new range. This is caused often by major economic or news reports.
Importance of Resistance and Support
The analysis of resistance and support is a crucial component of trends. This analysis of resistance and support can help in making trading decisions. Further, this can also be used to identify when one trend may reverse. These levels sometimes help one trader to identify an ideal situation of taking profits. For instance, if certain levels of price are reached, you may want to accept profits because you know the level of a price does not usually rise past one particular level of resistance. Similarly, if you can identify a level of support you will also realize that price does not fall below it; you could use the information to help you decide the entry point to your position.
Interesting Strategies Forex Resistance and Support
- When the price breaks through the resistance, the resistance could become support.
- The more frequent the price tests the level of a support or resistance without breaking the level, the area of support and resistance becomes stronger.
- When the level of a resistance or support breaks, the follow-through move’s strength depends on the strength of the broken resistance or support while holding up.
It is important that you understand the resistance and support and how they work. Over the time, you can also spot potential resistance and support areas easily.
The levels of resistance and support are the tools that a trader who uses technical analysis, should monitor and use. However, a trader should always remember that resistance should not be considered as just a random area, where the price takes a turn to another direction. There are traders and sellers who have sold one Forex currency pair before and still remember that their collective power that has the ability to push the price to a lower level. There are buyers as well who trusted support for a long time but were disappointed when the price didn’t go higher.