In the complex foreign exchange (forex) market, a clear understanding of price determinants and their manifestations is the key to success. Among these factors, the support and resistance zone plays an important role in determining the entry and exit points of a trade. So, what are resistance and support in forex, and how to determine the support and resistance zone? Let’s learn about Forex trading through the article below!
General understanding of the support and resistance zone
In this section, we will explore the basic concepts of resistance and support zones. Besides, let’s look at their importance in the forex market.
What is a resistance zone? What is the support zone?
Resistance zones and support zones are two basic but extremely important concepts. Especially in technical analysis of the forex market. These are price levels or areas where prices often tend to reverse or slow down before resuming the trend. This situation can completely repeat in the future.
- A resistance zone is an area where a stock’s price is trending up and is expected to reverse and decrease. Here, the selling force of the stock will prevail over the buying force.
- On the contrary, the support zone is the area where the price tends to decrease and is expected to reverse to the upside. At this price range, buying power will prevail over selling pressure.
To clearly distinguish the two resistance and support zones, you can visualize the following image:
- When prices go up and down, the area where the price is highest before continuing to decrease is called the resistance area.
- When the price adjusts down and bounces up, the lowest price area before the increase is called the support area.
How are resistance and support understood in forex?
In forex, resistance or support zones are not only specific stops but also areas where market sentiment and trading history are concentrated, creating key points for trading decisions… Professional traders often rely on these zones to determine entry and exit points, as well as set stop-loss and take-profit orders.
In the following sections, we will learn about the factors that determine the formation of the support and resistance zone, as well as how to identify and apply them in trading strategies.
See more: Everything you should know about Forex momentum!
What factors create the support and resistance zone?
In the forex market, resistance or support both play an important role in deciding on a safe investment. However, these areas can change and fluctuate over time. So, what makes up these regions?
According to the book “Financial Market Analysis” by John Murphy, there are two main factors that make support and resistance:
Market psychology
Market psychology plays an important role in creating resistance and support. The stock market has three main subjects: buyers, sellers, and outside investors. When prices increase, buyers feel regretful for not buying more, while outsiders also regret not participating in the market. On the contrary, when prices decrease, sellers feel regretful when they misjudge the price trend. This psychology creates consensus in setting prices at specific points. Finally, create resistance and support zones.
Investor’s mindset of regretting the past
The mindset of regretting the past also plays an important role in creating support and resistance. When a price range has been tested many times, investors can easily recognize it and make decisions based on observations and accumulated experience from the past.
Is there a way to identify support and resistance zones?
Determining support and resistance zones can be done using a variety of methods. Below are three common ways that investors often use.
Determined by the current trading price
A popular method for determining support and resistance is based on the current trading price. Traders often pay attention to important price levels such as previous highs and lows, Fibonacci retracements, or moving averages. When prices reach these levels, there may be a market reaction. Finally, create support and resistance zones.
Determine using a chart
The second way to identify support and resistance is to use a charting tool. Charts help visualize support and resistance more clearly. Usually, the most used tools are trendlines, price channels, or price models. From here, investors can see important resistances or supports where prices tend to stop or reverse.
Determined by price moving average
Using price averages such as SMA (Simple Moving Average) or EMA (Exponential Moving Average) is also a popular method to identify support and resistance zones. Specifically, when the price crosses the SMA line from top to bottom, a resistance area can be created. Conversely, when the price crosses the SMA line from bottom to top, a support zone can be created.
Instructions on how to effectively trade resistance and support zones in forex
To effectively trade support or resistance, you need to have a clear plan. And most importantly, you must follow a systematic process. Below are ways you can refer to apply:
Method 1: Place an order right at the support and resistance zone
When the price approaches any resistance or support zone, you need to observe it closely before preparing to place an order. This requires you to recognize signals from charts and technical indicators. Typically, there are signs of sudden increases and decreases in trading volume or the appearance of candlestick reversal patterns.
Method 2: Wait for the reversal signal
Price will not always reverse as soon as it touches resistance or support. Sometimes, you need to patiently wait for clear confirmation signals before entering an order. Usually, the clearest signals come from pin bars or engulfing candlestick patterns.
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Method 3: Place a trading order as soon as the support and resistance zone is broken
If resistance or support is broken, this could be a sign of a new trend. You need to quickly assess the situation and place orders in the direction of the new trend. At the same time, set stop-loss orders to limit risks.
Method 4: Wait until the price returns
After support or resistance is broken and the price has moved some distance. Sometimes the price will return to this zone. This is your opportunity to confirm the trend and place your next order. Of course, it must be based on the price reaction when it comes into contact with that area again.
Conclude
So, the above article is all useful information about the support and resistance zone. Hopefully, through the article you have gained a more in-depth understanding of how this region works to optimize your investment decisions. If you have any questions or are still wondering how to use momentum to determine support and resistance zones, please leave a question to Forex Trading. Our staff will help you give you an answer as soon as possible!
FAQs:
What role do support and resistance play in a forex trading strategy?
In trading strategies, support and resistance play an important role in determining entry and exit points in the market. They help identify potential reversal points and optimize the risk/reward ratio in trading.
What tools are used to determine support and resistance?
To effectively identify support and resistance, you must use technical tools. Some of these tools include moving averages, Fibonacci retracements, and candlestick patterns. All of them recognize important price levels. Then, combine signals from technical indicators and evaluate the overall market situation to decide whether to enter or exit the market.
How to use momentum to determine support and resistance?
There are ways to use momentum to identify potential reversal points at resistance and support levels. It is to monitor the increase or decrease in price momentum. This helps recognize the strength of the trend and make appropriate trading decisions.
