Why Support And Resistance Level Is Essential For Traders

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Why Support And Resistance Level Is Essential For Traders

Support and resistance level mainly helps traders to understand the asset price movement depending on the market trend. These technical analysis tools are widely used by Forex traders . However, it is essential for different types of traders.

To understand properly, first, you need to know how asset price moves.

In this article, you will find a short introduction with the necessity of support and resistance level. Let’s start with a simple definition.

What Is Support And Resistance Level

Support and resistance are the two levels of the price, at which the price will tend to stop or reverse in the Forex market. These levels are denoted by multiple touches of price without a breakthrough in the level.

These are also highlighted with angled lines called trend lines. Support occurs when falling price stops, changes direction, and begins to rise.

On the other hand, Resistance is the level, where the rising prices stop, change direction, and begin to fall. Moreover, you can easily assume these two terms.

The below information will give you a clear picture of these two trend analysis tools.

Support level can be described as the “floor” which is supporting or holding up prices where resistance level is the “celling” keeping prices from rising higher.

When the price breaks the support or resistance level, it continues to make another support/resistance level. It is a common scene in the Forex market.

Major Importance Of Support And Resistance Level

The necessity of these two levels is worth mentioning. Traders pay attention to these two levels as they highly influence the stock price.

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Traders usually can buy at a support level and sell at a resistance level. The support level helps traders to predict when to take profit.

If he has been short where the resistance level, helps to predict the time to take profit if he has been long.

Furthermore, Support gives the traders an exact picture of what price levels should prop up the price in the event of a correction.

Conversely, predicting the resistance level can be helpful as the price level can be harmful for a long position, an area where investors possess a high consent to sell the security.

Moreover, these levels are essential for technical analysts. They use these levels to assume the price points where the probabilities favour a pause or a reversal of a prevailing trend on a treading chart.

The trendline helps to set apart a longer-term trend. And also trendline guides the direction to trade-in. Let’s discuss it with an example.

If the trend is down but still a range develops, then instead of buying at a range support preference should be given to a short-selling at range resistance.

Here, the downtrend let us know that going short has a better probability of producing a profit than buying.

If the trend is up and then a triangle pattern develops, favour buying near support of the triangle pattern.

Lastly, buying near support or selling near resistance can pay off, but there is no assurance that the support or resistance will hold.

Therefore, consider waiting for some confirmation that the market is still respecting that area.

Forex Support and Resistance Explained

Support and Resistance Talking Points

  • The concept of support and resistance forms the basis of Forex technical analysis.
  • Forex traders look to buy at or near areas of significant levels of potential support in an uptrend
  • Forex traders look to sell at or near areas of significant levels of potential resistance in a downtrend.

You may have heard of the old business cliché “buy low and sell high”. New forex traders usually ask the question how low is low and how high is high. One way we can quantify these levels is using areas where price has stopped and changed direction. The area where price stops after moving up and then turns around is called resistance. Resistance acts as a “ceiling” capping the further advance of price.

Resistance is not just some random area where price turns around. There are potential sellers, traders who have sold a Forex currency pair once before and remember the collective power they had to push price lower. There are also buyers who went long at support and were disappointed that price did not go higher and will close their buy positions with sell orders at or just before price gets to the resistance ceiling.

Another group that make up resistance are the ones that bought at or near resistance and are trapped when price fell at resistance. These traders are begging for price to come up one more time to get them out at breakeven. All of these groups work together to send prices lower and make up the “supply” in the supply and demand equation. More supply than demand, price falls, more demand than supply price rises; Resistance=Supply.

Learn Forex: GBPUSD Support and Resistance

In the chart above of GBP/USD levels of support are highlighted in blue while levels of resistance are highlighted in red. In an uptrend, traders look to buy at support and take profits at the next level of resistance. By entering at or near significant levels in an uptrend, Forex traders can reduce their risk exposure and get a trading opportunity with an excellent risk to reward ratio. Forex traders are able to identify several places to trade with the trend . The levels of resistance can be used as profit target areas or breakout opportunities as price closes above resistance.

Learn Forex: AUDNZD Resistance Sell Zones

On the other hand, levels of significant resistance provide ideal entry points in a downtrend. They clearly show countertrend buyer exhaustion at point when sellers return . The next level of support can be used as a target area. Support can also be used as a breakout entry area if price closes below support.

The balance of power is clearly revealed at areas of support and resistance. Price can bounce from a floor and move up to the ceiling and then bounce down. It is important for Forex traders to first identify trend direction and then choose to buy at support in an uptrend or sell at resistance in a downtrend. Additionally, oscillators like RSI and stochastics can be used to identify significant areas of support and resistance.

Support and Resistance FAQs

Do you have any other resources for new traders?

Get to know the basics of forex trading through our New to FX guide . You will learn what forex is and how to trade it making use of leverage. Furthermore, this essential guide provides an understanding of commonly used forex jargon and how to read a basic forex quote. After reading the guide new traders should be well on their way to developing their own forex trading strategy. Our in house trading specialists present a number of webinars throughout the week. Take a look at our topics via the webinar calendar .

Which chart should I use, Candlestick, Bar or line chart?

Careful analysis of charts is essential to forex trading. Before trading it is essential that you understand how to read the 3 chart types: Candlestick, Bar and line charts. This is explained further in our Introduction to Charting page which will equip you with the basics you need to make informed trading decisions in the forex market.

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Support and Resistance Trading

Support and Resistance trading method. Lines. Levels, Strategies.

What is Support and Resistance?

Supply and Demand! One of the basic characteristics that determines the value of a product, commodity and even a currency, forms an important aspect when it comes to technical analysis of the forex markets. Prices in a currency pair tend to fluctuate when there is an imbalance of supply and demand. In this article, we’ll explain what supply and demand is and thus eventually illustrate the importance of trading with support and resistance and how traders can capitalize on this anomaly in order to take more effective trades.

What is supply and demand?

Supply is when there is an abundance of a product or when there are fewer buyers in a market. This scenario results in prices being reduced.

Demand, is when there is an abundance of buyers or when the availability of the product is much lesser, which tends to raise the value of the product.

Therefore, in forex terminology, when there are a lot of sellers, the price tends to drop and when there are many buyers, the price tends to rise.

Supply and demand, in trading terminology can also be referred to as support and resistance.

What is support in forex? Support is nothing but a level or a zone where there are more buyers than sellers, thus forming a floor and where price tends to rise in value. Resistance, in forex is where there are more sellers thus resulting in a drop in a price.

In simplistic terms, it is ideal to sell at resistance (or supply levels) and to buy at support (demand levels).

Support and resistance form an important aspect of trading the forex markets. They are not constant and continue to change constantly as the market dynamics continue to change. Understanding support and resistance is an important concept in trading and it is essential for the trader to understand these concepts.

Support and resistance levels can assist in various forms of trading, the most common trading systems of which are as follows:

To understand any of the above, we need to first get an idea of how support and resistance levels are depicted in the charts.

In the chart above, notice the highlighted areas depict support and resistance, with the red and green arrows. Take note of the green arrows depicting the support level where price has managed to rally twice.

Support & Resistance – Cheat Sheet

The following points should help the reader understand support and resistance levels in forex.

  • Support level is usually determined as a price zone where prices usually rally when reaching that zone
  • Resistance level is determined as the price zone where prices tend to drop upon reaching that zone
  • Past support levels, when broken can turn to resistance and vice versa
  • Price remembers past support and resistance levels, especially over longer periods of time
  • Round numbers especially form support and resistance levels. These are often referred to as psychological support/resistance levels
  • Price always comes back to test the support or resistance levels
  • It is always best to trade the first test of support or resistance levels

In this next section let’s see how support and resistance levels help in each of the five approaches to trading and also how trading with any of these five approaches can help in improving the odds when taking into consideration the aspect of support and resistance (or supply and demand) in trading the forex markets.

1. Support and Resistance during breakouts

Trading breakouts is an approach when price tends to move within a tight range over an extended period of time. The direction of the breakout, while uncertain can help determine if there are more buyers or sellers. Or in other words, if a support or resistance level is being formed.

The chart below shows how after periods of consolidation or price moving in a tight range, there was a breakout to the downside. During the process, we notice a moment where price tried to break out to the upside but failed. Traders without an understanding of support and resistance would have seen that as a long entry, but soon would have resulted in a losing trade. The trick is to look to the market structure to the left of the chart.

We notice here how past attempts to break out to the upside failed. Therefore, any attempts to the upside should be viewed with suspicion. After a while price managed to breakout to the downside. But this too should be viewed with suspicion. The trick is to trade on the retest of this breakout, which as shown in the chart depicts how the breakout level has formed resistance.

From the chart, we also notice how there was an intermediate support level formed, which is where we would be looking to book profits.

2. Trading reversals with support and resistance levels

Support and resistance also helps with trading reversals. The key to trading reversals is in identifying past support and resistance levels. In the chart below we plotted a support level based on previous price action. ( ? What is Price Action tarding? ) After a brief rally, we see a downtrend being seen on the charts. Incidentally, we see a sharp reversal from the previously identified support level. Notice how price makes a very sharp pin bar to reverse from this support level?

Without the use of support and resistance, traders would have continued on with their shorts without knowing how price would have reversed when revisiting the past support level.

3. Trading pullbacks to support and resistance levels

Trading pullbacks offers an effective way to take a safe trade entry. In the following chart, we show how in a downtrend, price made several pullbacks right to previous support levels which turned to resistance. These traders would have offered a very safe trade entry with a very strong risk/reward trading strategy.

If you look closely you will notice how the pullbacks happen into the regions of past support levels. In the above example, we see three such instances which would have offered a great way to trade with a low risk, high probability trading strategy by simply determining the trend and the support and resistance levels.

4. Psychological support and resistance levels

Another support and resistance levels is the psychological numbers. The best illustration of this could be seen in the USDJPY where it is easier to spot as well as understand.

In the USDJPY chart above, notice how price reacts to key psychological levels of 95, 100, 103 and so on?

What are psychological support/resistance levels?

Psychological support/resistance levels are nothing but round numbers. For example, 1.3 in EURUSD, 1.6 in GBPUSD or 100 in USDJPY and so on are considered to be psychological levels. These levels however are not support or resistance levels, but in fact can act as either of the two. For example in the case of USDJPY, notice how the psychological level of 100 acted as resistance earlier on, which in turn became support as price managed to break above it?

The psychological support/resistance levels also offer a way to trade and can be used as entry points or exit points for booking profits.

5. Trend line support and resistance levels

Support and resistance levels can also be determined with trend lines. In the following charts, we see a down slope trend line. While the trend lines tend to act as support (in case of an uptrend) and resistance (in case of a downtrend), they also depict the price zones as well.

In the chart below we notice that besides the trend line acting as resistance, they also depicted horizontal support/resistance levels. Look closely at the charts and you will notice how price bounced off those levels at first contact. Pay attention to the most recent price action. To the layman, it might seem as a reversal. But for traders familiar with support and resistance, will know why price bounced off from that level, which incidentally was a strong support level.

As can be seen from the above examples, support and resistance forms one of the most basic building blocks of trading. They are also referred to as supply/demand levels. By having a firm understanding of the support and resistance levels, traders would be able to improve any trading system that they currently follow. See more about TrendLine trading here

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