Chapter 7: Support & Resistance
Understanding Support and Resistance is another essential Forex trading methods that helps you making a successful technical analysis using trading charts. Learn how to identify these major price levels, and you will know enough to build a good strategy to trade Forex.
Support is the important price area where demand starts to rise higher that it stops the value from further decline. It is the area where buyers consider joining market and starting buying.
Resistance is another level where supply begins to rise that it prevents the value from further growth. It is the area where sellers find the opportunity to enter market and sell heavily.
Ways to Find Horizontal Support and Resistance
There is no particular custom indicator to recognize of these values on trading charts. These two conditions could be recognized by several different ways on trading charts.
The most familiar condition is horizontal price value as support or resistance. You can recognize it just by looking into a price history on your chart and finding the level where the price stop its most significant moves.
Strength of These Technical Areas
Your chart could be based on different time-frame. You can make use of different time periods as you want, for example 15 minutes, 30 minutes, 1 hour, weekly, and so. You can easy find these horizontal levels on any time-frame.
So, you must identify levels that are stronger and useful than others but of course it is very simple as well. Prices from a weekly time-frame are more significant than daily period, and these are stronger points than prices from a 15-minute intraday period used by short term day traders.
These Levels Can Be Broken
Nothing is forever. The same applies to Support and Resistance levels. Thus, any of these levels can be broken. However, such a break can be a great opportunity for executing a trade. Such break of these levels changes whole summary and view of traders and so it usually leads to huge liquidation of old positions and execution of new positions in market.
Keep in mind, these simple significant rules for your analysis and strategy:
- Broken support is the new resistance area
- Broken resistance is now the new support area
How to Trade Support and Resistance
Now that you are familiar with the basics of support and resistance, it is time to make use of these basic but very helpful technical tools in your trading. As we want to make things simple and easy to understand, we have divided the idea of trading support and resistance levels into two categories: the Bounce and the Break.
Now, we will learn how to trade support and resistance using the Bounce. As the name suggests, it is a technique of trading horizontal support and resistance levels just after the bounce.
A lot of retail Forex traders make the mistake of executing their orders straight on support and resistance areas and then simply wait for their trade to happen. This kind of method may work at times but in a long run, this kind of method supposes that a support or resistance level will grasp without price actually getting there yet.
You might be asking yourself, ‘Why don’t I simply set an entry order exactly on the line? This is how I am confident the best potential price’.
However, you must know that when playing the bounce with support and resistance you need to tilt the odds in your favor and identify some sort of confirmation that the support or resistance will hold.
Rather than buying or selling right off the bat, wait for it to bounce first before executing your trades. By doing this, you can easily avoid those moments when price changes very fast and break through support and resistance levels.
In Forex trading market, we could easily jump in and out whenever price hits those key support and resistance levels and generate enough profit. But, reality of the matter is that these levels break… frequently.
Therefore, it is not sufficient to just play bounces. You should also follow break points to identify the best opportunity to execute your trades.
In Forex trading, support and resistance method is a significant part of trends as it can be applied to help make trading decisions and recognize when a trend may be turning around. These levels can often facilitate a trader to determine when to enter market and make profits. Support and resistance levels are methods every trader that utilizes technical analysis should follow and observe. After practicing for some time, you will be able to identify possible forex support and resistance levels very easily.