Support and resistance in Forex play an important role in technical analysis. Support helps determine the exact entry point, while resistance helps determine the exit point. But what is the exact definition of support and resistance? How to identify them on the chart? Let’s find out through the following article from Forex Trading.
What is the concept of Support and resistance in Forex?
Support and resistance in Forex zones in Forex are past price levels where prices have tended to reverse upward or downward. These are the points where demand and supply meet. Identifying these levels helps traders understand market psychology and predict the next price direction. When these levels are broken, the price can move in a new direction. And this can create new support and resistance levels. So what is the separate concept of support and resistance definition?
- Resistance: The highest point the price reached in the past before decreasing again. When the price approaches the resistance level, many investors will sell.
- Support: The lowest point the price reached in the past before rising again. Investors often buy when the price reaches the support level.
See more: Everything you should know about Forex momentum!
Ways to identify support and resistance zones
There are several popular support and resistance methods today. These ways can be listed as follows:
Use trend lines to identify resistance and support
Resistance and support in Forex are basic concepts in technical analysis, helping investors determine price zones to buy or sell stocks. Using trend lines to locate support and resistance is an effective way.
In a downtrend, connecting price peaks create a resistance line. As the price approaches this line, selling pressure may increase. In an uptrend, connecting price bottoms creates a support line. As the price approaches this line, buying pressure may increase, pushing the price back up.
Use price-moving averages
Moving Averages can be used to determine short-term support and resistance. Moving averages help reduce short-term price noise, creating support lines when prices are below and resistance lines when prices are above.
When the price crosses the 20-day moving average, this line becomes support. As the price approaches this line, buying pressure increases, pushing the price back up. Conversely, when the price is below the 20-day moving average, this line becomes resistance. As the price approaches this line, selling pressure increases, pushing the price back down.
What is support and resistance in the price range?
To identify support and resistance zones, you can use candle shadows. If you see a lot of candles concentrated in the high or low area, you can use the price range between the highest or lowest price and the most recent closing price.
What are the types of support and resistance lines?
Support and resistance in Forex is considered the most effective analysis tool for investors. There are 7 common types of support and resistance:
- Following the trend: Determined by connecting the 2 closest peaks or 2 bottoms.
- According to moving average: Use the MA line to determine.
- Follow Fibonacci retracement levels: Use Fibonacci numbers.
- By trading zone: Shaped by the top and bottom of the price.
- Gap Following (GAP): Recovering from a price gap.
- At round prices: Round prices like 1.2000 or 1.3000.
- Combine large and small time frames: See support and resistance in different time frames.
How to trade with two types of support and resistance lines
There are two popular trading methods with support and resistance that many traders use. These include trading when the price reacts and trading when the price breaks out.
Trade Support and resistance in Forex when the price bounces back
This trading method focuses on waiting for the price to react after coming into contact with a support or resistance line. Instead of opening an order as soon as the price approaches these zones, we wait to confirm the price reaction before executing the trade. This helps minimize the risk that the price may break support or resistance levels.
Trade resistance and support when price breaks out
In reality, support and resistance levels are not always maintained permanently but are often broken. When a breakout occurs, there are two trading approaches:
- Aggressive way: The trader will execute a buy or sell order as soon as the price breaks the support or resistance level (the price moves through this zone strongly).
- Conservative way: Instead of opening an order as soon as the price breaks the support or resistance level, you wait for the price to “rebound” to the broken area before proceeding with the trade.
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Some notes when trading Support and resistance in Forex
Support and resistance become strong as the price often fluctuates within this area without breaking out. Once the price breaks support, it can become resistant in the future if the price drops sharply. Conversely, resistance can become support if the price increases sharply.
Before placing an order, let the price form clearly, because the market can create fake breakout moves, causing investors to misjudge the market. For short-term traders, focus on the current day and mark new support and resistance levels as they appear.
Trading support and resistance requires a lot of practice. Identify and trade on a demo account before moving to real trading. Only when you have stable profits for a few months should you consider trading with real money.
Conclude
Above is all the information about Support and resistance in Forex that many investors are interested in. These two factors play an important role in market analysis and price trend assessment. Hopefully, the knowledge that Forex Trading shares will help investors effectively apply support and resistance to optimize profits from trading.
FAQs
How does identifying resistance and support help traders?
Identify future support levels that could improve profitability. Because it indicates where the price might stop. Conversely, foreseeing the resistance level is also important because it warns the trader to be cautious as the price approaches this area. There are many different methods for determining support/resistance levels. Essentially, however, the trader is looking for signs that the price may react in a certain direction as it approaches a recognized price level.
Are there any specific levels when setting support and resistance?
Support and resistance are often viewed as “zones” rather than “levels”. Although it is common to place them near the price action, some traders may place them at or near the price action. In some cases where it is difficult to determine a specific level, placing resistance and support zones near the price action is appropriate.
What is the biggest difference between support and resistance?
In a downtrend, support appears to indicate where the downtrend may stop temporarily due to the concentration of demand. Meanwhile, resistance appears during an uptrend and represents a limit that the asset price is unlikely to overcome due to selling pressure.
