In Forex technical analysis, support and resistance are predetermined levels at which the price is expected to reverse. Support and resistance are powerful tools in trading that are used in many trading strategies. Detecting support and resistance is very helpful in choosing the proper trades, they can also help in deciding where to enter or exit the trade.
What is Support?
A support level is where the price tends to find support and reverse to the upside. It is a price level at which the price is more likely to bounce off rather than continue falling. However, by breaching this support level, the price is likely to continue falling until the next support level.
At the support level, the demand is usually strong enough to stop prices from falling any further. As the price drops and approaches support, buyers are more inclined to buy and sellers become less willing to sell. Usually, both will wait to see a clear breach or reversal before deciding their trades.
What is Resistance?
A resistance level is where the price tends to find resistance as it rises, and is most likely to reverse to the downside. It is the opposite of a support level. It means that the price is more likely to retreat from this level rather than break through it. However, by breaching this resistance level, it is likely to continue rising until the next resistance level.
Resistance is the price level at which supply is usually strong enough to stop the prices from moving higher. As the price rises and approaches resistance levels, sellers become more inclined to sell while buyers become less willing to buy.
How do Support and Resistance work?
Support and resistance mark the levels or zones where you can enter or exit a trade. The price either reverses from these levels or breach and continue the current trend. If a pair’s price breaks support or resistance, the price often continues to the next level of support or resistance level or area. Support and resistance levels are not always exactly as they can be an area or price range. They help identify possible areas where price may change directions.
Support and Resistance Trading Strategies
The trendline strategy utilizes the trendline fulcrum points as either support or resistance, by simply drawing a line connecting two or more highs in a downtrend or two or more lows in an uptrend. A strong trendline will let prices bounce off the trendline and continue to move in the direction of the trend.
Breakout and Pullback Strategy
Usually, after a period of directional uncertainty, the price will eventually surpass these levels and begin a new trend. Traders often search for such breakouts below support or above and buy/sell on increasing momentum in the other direction. If the momentum is strong enough, a new trend will be started. In some cases, to avoid falling into the trap of trading the false breakout, traders tend to wait for a pullback towards support or resistance before entering a trade.
Range Trading Strategy
Range trading is the price level range between support and resistance where traders aim to buy at support and sell at resistance. Usually, ranges tend to appear in sideways trading markets where there is no clear indication of a trend. A range-bound market means that traders are long when the price bounces off support and short when the price retreats from resistance.
Support and Resistance Role Reversal
One of the common concepts in forex technical analysis is that when a resistance or support level is broken, its role is reversed. That means if the price breaks or falls below a support level, that level will become a resistance level. On the other side, if the price rises above a resistance level, it will often become a support level instead. As the price breaches a level of support or resistance, the supply and demand are inverted, causing the breached level to reverse its role.
Why technical analysis is important for forex trading? According to studies, most successful forex traders rely on technical analysis to study the market. In the forex market, traders can use technical analysis to analyze the major pairs, Gold, and cryptocurrencies. Technical analysis is a common method used by investors to analyze the financial markets. The main benefit of learning forex technical analysis is to identify the relationships between price/volume and market indicators such as the moving average.
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