What is Support and Resistance in Forex?


Support and resistance are important points where the forces of supply and demand meet. Support and resistance levels can be seen as technical analysis used to determine market psychology and supply and demand. When support and resistance levels are broken, the forces of supply and demand can be interpreted as having moved, so that new levels between the two are likely to form. In simple terms, support and resistance lines are used to identify when you will buy or sell an asset, and usually stocks to currency pairs are used. These levels are usually temporary in the short term, but can also last a long time because the market is always receiving the latest information.


Support and resistance lines are two or separate line zones on the chart. The lines point to two price points that act as barriers that prevent the price from moving up and down when passing through these points. In addition, at this level, the horizontal line is not necessarily completely straight, but can be slightly slanted up and down, depending on the overall price trend. At the support level, it shows buying interest and the line always points below the current market price. Conversely, at the resistance level, it shows selling demand where the line is above the current market price.

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Support and Resistance Strategy

 


Support Levels


The support level is the minimum price of an asset that does not fall beyond that point within a certain period of time due to sufficient purchasing power. When the price of an asset approaches this level, it can become more affordable in the process. In the eyes of buyers, this is a good deal where they prefer to make a purchase. And if enough investors buy the stock, it will prevent the price from falling further. On the other hand, sellers prefer not to sell because the value of the stock is falling. When this happens, demand (buyers) will beat supply (traders), which in turn will stop the price from falling below the support level.


Level Resisten


Resistance level is the opposite of support level. At this level the maximum price that the asset can reach and cannot be exceeded for some time. The number of sellers who want to sell at a certain price to prevent the value from rising higher. This means that the supply is strong enough to stop the price from rising above it. The reason behind this is that if supply is higher than demand, it means that the price will stop moving above resistance.


Examples of Support and Resistance in Stocks


Traders can use support and resistance levels to determine whether to buy or sell. Here is a simple example to help you understand the concept of two support and resistance lines and how they are used by traders. For example, Michael is a day trader who is interested in buying shares of Apple (NASDAQ: AAPL). He wants to know whether to buy or use the support and resistance levels. Michael then decides to look at the annual price and volume data graphically provided on the chart. He sees on the chart that Apple's stock price has risen to $160 in the past year, therefore, $160 is a resistance level. Michael also sees that the price has not dropped below $119 in the past year, which is a support level.


With this information, Michael will then wait for the next time until the stock price drops near $119 to trade and buy Apple shares at the support level, assuming that this is the lowest price he can buy.


How to Determine Forex Support and Resistance


Support and resistance can serve as potential entry and exit prices for trading. When the price reaches the support and resistance lines, there are two options, namely the price will bounce back as expected, or the trend is broken. The price will continue to move in the other direction until it reaches a new support and resistance level.


4 Support and Resistance Strategies


  • Range Trading


Range trading occurs in support and resistance areas because traders aim to buy at support levels and sell at resistance levels. Think of the area between support and resistance as a room. Support is illustrated as the floor and resistance is the ceiling. Ranges tend to occur in sideways trading markets where there is no clear indication of a trend.

Tips for use: support and resistance levels do not always form a perfect line, sometimes the price will bounce to a certain area, thus forming a perfect straight line.


  • Pullback Strategy


Often after a period of uncertainty the price will breakout or pullback. Traders often look for such a breakout below a support level or above a resistance level in order to capitalize on further upward momentum in one direction. If the momentum is strong enough, then there is a chance of starting a new trend. However, in an effort to avoid falling into the trap of trading false breakouts, professional traders tend to wait for a pullback before trading. Many traders may get carried away and rush to enter a short trade prematurely. Instead, traders should wait for a response in the market (where buyers are trying to take control) to stop before entering a short trade.


  • Trendline strategy (trend line)


In this strategy, you only need to draw a line that connects two or more of the highest points in a downtrend, or at two lowest points in an uptrend. In a strong trend, the price tends to bounce off the trend line and move in the direction of the trend, so traders in this case should look for entries in the direction of the trend to allow for higher trading.


  • Determining Support and Resistance With Moving Average

 

Moving averages (MA) serve the dual function of dynamic support and resistance. Popular MAs to include are the 20 and 50 period moving averages slightly modified to 21 and 55 period moving averages to take advantage of Fibonacci. It is not unusual for traders to include the 100 and 200 MAs. Ultimately, traders are free to find the settings that are comfortable for them.


Which time frame is best for support and resistance?


As with any other part of your analysis, it is best to start on a higher time frame. This helps to find the most accurate support and resistance levels, as higher time frames have the greatest influence on the market. Once you have identified support and resistance areas on a longer time frame, concentrate on a shorter time frame.