The concept of using support and resistance in forex trading is one of the most prominent attributes in technical analysis.
Traders use this concept to determine price levels on charts that act as barriers. These barriers often prevent the market from moving past specific price levels.
When the market is in a downtrend, support is the price level where traders expect the price to pause as demand grows. This happens when interest in buying increases due to the decrease in price.
A resistance level forms when the price increases to a value that becomes enticing enough for sellers to to enter the market.
Why Use Support and Resistance?
One of the key reasons that traders use support and resistance is to determine specific entry and exit points.
Here’s what happens.
When price reaches support or resistance, it either bounces away from those levels or violates them by penetrating through and carrying on until it reaches the next support or resistance.
In most cases, traders believe that price will not break support and resistance levels. They enter the market once the price bounces off support or resistance. If the price breaks those levels, they enter the market above resistance or below support. At Forex Varsity, we show you how to identify support and resistance levels and good entry points.
How To Recognise Support and Resistance Levels?
Think of support as a price level that acts as a floor, preventing the price from pushing downwards. Identifying the level of support enables a trader to determine good buying opportunities.
Think of resistance as the ceiling that prevents the price from pushing the price upwards. At the resistance level, traders look to enter the market with the intention to sell.
Keep in mind that support and resistance levels are not exact numbers.
In some cases, support or resistance might appear to be broken, but it could be that a candlestick’s wick has violated the levels, yet the candlestick’s body has respected the level. In this instance, support or resistance has not been broken.
A support or resistance becomes valid when the price has touched a specific level at least three times and has failed to break through it.
Trendlines
The price of an asset generally tends to trend upward to downward.
When a financial asset trends upward, resistance forms where the market starts to slow down and retrace toward the trendline. Traders focus on the market as it falls toward the support on the trendline since that area has prevented the price from moving lower in the past.
The market forms a zig-zag pattern as it trends up or down. Identifying the zig-zags can be tricky, but it’s essential to determining the trend. Forex Varsity trainers show you the right way to do it. The other way to identify resistance on an uptrend is that it’s the highest point reached before the pullback. Support will be at the area where the price reaches the lowest point before it starts to go back up.
The opposite is true for a downtrend. Once you’ve connected the highs and the lows of the market in a trend, the market is said to run in a channel.
Goran Radanovic
