How to define resistance support in technical analysis

Resistance support plays an important role in technical analysis charts. Identifying zones helps investors make more accurate trading decisions. How to determine these thresholds effectively? Forex Trading will provide you with detailed information through the article below.

Learn the concept of resistance support in Forex

Let’s learn about the concept and how to define it in the next parts of the article.

What is support and resistance?

What is support and resistance? These are price areas where in the past, the price has reversed up or down, and there is a high possibility of similar behavior in the future. These are the points where supply (sell-side) and demand (buy-side) meet.

These levels are very important for traders when analyzing market sentiment and supply and demand dynamics. When these levels are broken, the price will tend to move in a new direction. This leads to the establishment of new support and resistance levels.

What is support?

Support is the lowest price that the market reaches before rebounding. When the price hits the support level, investors often take advantage of this opportunity to enter buy orders.

What is resistance?

Resistance is the highest price the market reaches before turning down. At the resistance point, many investors often decide to sell.

See more: Everything you should know about Forex momentum!

Momentum angular and support/resistance in Forex

Momentum angular (MA) is a physics concept applied to Forex to measure the rotational force of prices. A high MA shows that the price tends to continue moving in the current direction, while a low MA shows a possible reversal.

Application:

• Identify support/resistance areas: The low MA area can be a potential support area, where the price can bounce back and go up.
• The high MA area can be a potential resistance area, where the price can reverse and go down.
• Trend confirmation: ascending MA shows that the uptrend may continue, and descending MA shows that the uptrend may reverse.
• Evaluate entry/exit points: Buy when the price has a low MA in the support zone, and sell when the price has a high MA in the resistance zone.

The role of support and resistance in Forex

Understanding the role of resistance and support brings many benefits to UK traders:

• Determine entry/exit points: Support can be a potential buy point when the price is likely to bounce up. While resistance can be a potential selling point when the price can reverse.
• Trend assessment: Repeatedly broken resistance support zones may indicate a potential trend change.
• Filter market noise: Help traders focus on important price levels. Both ignore insignificant short-term price fluctuations.
• Risk management: Using to set stop losses can help traders limit losses.

  

Instructions on how to effectively identify support and resistance zones

Understanding their nature is essential for investors to be able to make accurate decisions. To determine, we can do the following steps:

Support and resistance is an area

Both are defined as price ranges, not a specific price. You can use candle shadows to define these zones.

At the peak, resistance is the distance between the highest price and the closing/opening price. If many candles form a resistance area, it will be a strong resistance area, making it difficult for the price to overcome.

At the bottom, support is the distance between the lowest price and the opening/closing price. If many candles are forming a support zone, it will be a strong support zone, making it difficult for the price to fall through this zone.

Use trend lines

If stock prices fluctuate continuously, investors can apply this method. From there, you can make a more informed decision to buy or sell. By connecting the peaks of the highest or lowest price over a certain period, you will create a trendline. This trendline will indicate an area of ​​increased buying or selling pressure as the price approaches this line.

Use price-moving averages

To determine the short-term, investors can use moving averages (MA). Moving averages help eliminate noise signals and allow you to identify a support zone when the price is above the average line and a resistance zone when the price is below the average line. As the price approaches the moving average, selling pressure tends to increase, leading to a decrease in stock price. On the contrary, when the price is further away from the average line, buying pressure will increase, helping the price return to an uptrend.

Other ways of determination

There are many methods to determine, including the use of even prices and the Fibonacci number sequence. These levels create price equilibrium points, assisting investors in making accurate decisions. However, the analysis goes beyond just support and resistance; Investors also need to research more deeply about the industry, stock valuation, and other factors to have a comprehensive view.

How to trade with resistance support to optimize efficiency?

To optimize trading performance, you can refer to some of the methods below:

Make a trade at the resistance support zone

Placing a limit Buy/Buy order at the support area and a limit Sell/Sell order at the resistance area is a popular strategy. However, it should be noted that placing an order right at this zone can easily result in a Stop Loss sweep when the price strongly touches the support/resistance level. To minimize this risk, investors should use reputable brokers and combine many other tools and signals for support.

Wait for a reversal signal before placing an order

Reversal signals can come from price channels, Breakout Trendlines, moving average (MA) reversal signals, MACD, RSI index, or candlestick reversal patterns. Many people prefer signals from candlestick reversal patterns because they often appear early and have a clear Stop Loss level on the candlestick pattern.

Place orders immediately when broken

When they notice a breakout, investors often place orders immediately. If the support is broken, place a Sell/Sell limit order. If the resistance is broken, place a Buy/Buy limit order.

Wait for the price to return to the support/resistance zone after being broken

Once the support zone is broken, it can become a resistance zone and vice versa. Investors often wait for the price to return to this area before making trading decisions.

See more: XTB: The most reputable and quality broker in UK

Note about resistance support

1. Both represent threshold zones on the price chart, reflecting market and trader psychology when trading. They are used to identify entry and exit points on the chart.
2. Support is the price below the current price, while resistance is the price above. Every bottom can become support and every peak can become resistance. However, not every price level can be a potential zone, but requires thoroughness and combination with other support and analysis tools to forecast trends more accurately.
3. Do not try to draw too many resistance support lines on the price chart at the same time. You should find important areas and only draw on those points.
4. In the Japanese candlestick pattern, the resistance support lines do not necessarily touch the high or low price on the chart. It is important to rely on each trader’s analytical and evaluation skills to determine the correct price position and direction.

Conclude

Resistance support is two extremely important price zones. They play a decisive role in determining future price trends. Many traders have found success by applying this method to their trading strategy. Hopefully, the information Forex Trading has provided will be useful for you in accessing and understanding these important price zones. Wishing you gain knowledge and success in your trading journey.

FAQs

Why are support and resistance important in Forex trading?

Resistance support provides traders with information about market sentiment and potential future price movements. Traders can make informed trading decisions in:

• Buy when the price is likely to bounce from the support zone
• Sell ​​when the price is likely to reverse at the resistance zone
• Set a reasonable stop loss to limit risks

What is a Forex trading strategy that uses support and resistance?

• 1. Breakout trading: Buy/sell when the price breaks out of a strong zone.
  2. Retracement trading: Buy/sell when the price retraces to the broken Resistance support area.
  3. Range trading: Buy when the price touches the support zone, sell when the price touches the resistance zone.
  4. Combination trading: Combine multiple strategies to increase efficiency.

What is support and resistance in the Forex market?

In the Forex market, support is a price level below the current price. While resistance is a price level above the current price. Both play important roles in determining entry and exit points into the market.