Forex and Support Resistance



Support and assistance are levels where price will potentially stall, and sometimes even reverse. It is also one of the most commonly used concepts in forex trading.

Here is an illustration for better understanding:

When the forex market moves up, then goes back down, the highest point before it fell back down is called resistance.

As the market proceeds to go back up, the lowest point reached before it restarted is called support.

In this way, resistance and support repeatedly formed as the forex market wavers over time. The reverse is also true for the downtrend.

Plotting Forex Support and Resistance

You have to remember that support and resistance levels are not exact numbers.

You will usually see a support level that appears to be broken, but eventually you will figure out that the market was just testing it. With candlesticks charts, these “tests” of support and resistance are usually represented by the candlestick shadows.

When the prices go through resistance, the resistance could probably become support. The more frequent price tests a level of resistance or support without breaking it, the stronger the area of resistance or support is. Also, when a resistance or support level breaks, the strength of the follow-through move depending on how strongly the broken support or resistance had been holding.

Trend Lines

In the most basic form, an uptrend line is drawn at the bottom of easily figured support areas, which is called valleys. In a downtrend, the trend line is drawn above the easily figured resistance areas, which is called peaks.

The three types of trends are:

  1. Uptrend, the higher lows
  2. Downtrend, the lower highs
  3. Sideways, or the ranging

Channels

To create a rising channel, simply draw a parallel line at the same angle as an uptrend line, and then move that line to position where it meets the most recent peaks.

To make a declining channel, simply draw parallel line at the same angle as the downtrend line, and then move that line to an area where it meets the most recent valley.

Remember:

  1. Ascending Channel, also higher highs and higher lows
  2. Descending Channel, also lower highs and lower lows
  3. Horizontal Channel, also the ranging

Trading support and resistance levels can be halved into two methods, which are the bounce and the break.

The Bounce – With this trading, you do not just simply buy or sell right away; you wait for it to bounce first before entering. This should avoid those moments where prices moves too quickly that it cuts through support and resistance levels.

The Break – The break is when you simply buy or sell whenever the prices meet the support or resistance zone. However, there is also a conventional way of doing this. You wait for the price to make a “pullback” to broken support or resistance level and enter after the price bounces.

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