There is much to be learned for those wishing to trade in the forex market. A good place to start your forex trading education is with the concepts of support and resistance.
The concepts of support and resistance are truly two of the most highly discussed facets of technical analysis and are quite often regarded as complex by beginning traders. A thorough study of this subject is beyond the scope of this article, but we’ll attempt to simplify the subject by focusing on the basics of what traders need to know.
When looking at a chart, you’ll notice that price doesn’t typically move in a straight line. It moves up, then down, then up, then down, giving the appearance of a sawtooth.
When you draw a line connecting the lowest price points, that is your support line. To draw a resistance line, you would connect the highest price points. This is only a very basic idea to provide a picture; there is more to determining which bottom points and which top points need to be considered.
Now when you look at this support line connecting the low price points, you can see how it tends to act as a floor, preventing prices from going below that level. Rather than break through this line, prices are more likely to bounce off the support level. But when the price finally does manage to break through the support level, it is likely to continue dropping until it reaches another support level.
One can view the resistance level as being the opposite of a support level. At this level, the price tends to find resistance as it climbs higher. And just as with support, price tends to bounce off this level rather than break through it. But once price manages to break through the resistance level, even by the smallest of amounts, it will more than likely continue rising until it finds another resistance level.
If a price breaks past a support level, that support level often becomes a new resistance level. The opposite is true as well, if price breaks thru a resistance level, it will often find support at that level in the future.
Support and resistance levels many times represent the prices that are most influential to a currency pair’s direction, and are therefore used by many technical traders to determine their entry and exit prices.
In the beginning, understanding the concept and explanation behind identifying support and resistance levels may seem easy. But as new traders delve into this study, they soon discover that support and resistance can come in a variety of forms and is actually more tedious to master than it first appears.
You can identify dozens if not hundreds of price patterns using only support and resistance. Those patterns can be found in any time frame charts from 15 minutes to daily charts. It is possible to develop a trading strategy based entirely on support and resistance levels. To go one step further, you can make a living trading forex if you only master support and resistance. So if you know nothing more about forex, we urge you to at least master the study of support and resistance in your forex trading education.
Author: Nathaniel DuboisThis author has published 1 articles so far.