As their names suggest, support and resistance act as barriers within forex markets and are easily spotted on price charts either preventing price from moving higher or lower. This can be seen on any forex chart and across all timeframes with those most influential areas of support and resistance potentially still existing in the market years after they were originally created. Both support and resistance in forex trading are known as areas which have historically caused large number of traders to enter the market. Often these areas also have a very large number of automated trades and orders which are triggered as soon as price reaches these levels. The typical battle between Bulls and Bears attempting to push the price lower and higher will result in this area either forming an area of support or resistance. Most often, areas that were previously levels of support become resistance once they have been breached and vice versa.
Why are support and resistance so important for forex traders?
Trading forex using support and resistance can be one of the most effective ways to successfully predict future price movements. Not only do areas of support and resistance show traders the sentiment of the market as a whole, with support and resistance either holding firm or being breached, but it also can show forex traders where not to enter a trade. Support and resistance therefore creates a map of the price chart, showing us where price has previously reversed or bounced and trading strategies can successfully incorporate this knowledge. Having the ability to predict where the majority of market orders exist is a powerful tool which can be learned using the simple analysis of any forex chart.
How to identify areas of future support and resistance
Identifying areas of support and resistance can be most effectively done by zooming out on any price chart and looking at the areas where price has historically reversed, reached a new high or moved sideways. By simply applying horizontal lines to charts where this has occurred will show a trader how significant this area is considered by the market. Those areas of support and resistance which should be considered the most effective are when it can be seen to have influenced price on several occasions. Many of the most powerful areas can be seen on hourly or daily price charts going back several years. When price approaches these levels it bounces off and explains why several market lows can be seen to have reversed at precisely the same point. Similarly, popular tools such as daily pivot points and Fibonacci retracements attract large numbers of order to create support and resistance.
The most effective ways to use support and resistance to trade currencies
Trading these areas of support and resistance can be done in several ways and there are many strategies which use these to confirm a profitable entry. Once of the most straightforward is used by ‘tough traders’ who simply place a reversal order in the market at these critical areas. Once price reaches the trader’s order they anticipate that it will reverse, or at least retrace, and provide them with a profitable trade.
Another less risky way to trade using support and resistance involves waiting for a secondary signal before entering. This can be done successfully using candlestick analysis or applying a momentum indicator or MACD to the charts. Secondary candlestick signals to reinforce the existence of support or resistance may be the existence of a popular reversal pattern around these areas. Another technique is to wait for an area of support or resistance to be broken to confirm the strength of the market move. The fact that markets frequently re-test an area once it has been broken offers opportunities for trades and also confirms that the support has now become resistance or vice versa.
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