Support and
Resistance in Forex Trading: A Beginner's Guide
Support and
resistance levels are important technical indicators that traders use to
identify price trends in the forex market. In short, support levels are levels
at which price declines are consistently rejected, while resistance levels are
those at which price increases are consistently rejected.
Traders who
examine a support and resistance level in conjunction with one another are
essentially examining a channel. Price trends within trading channels are very
common, which means that a currency may trade within the bounds of support and
resistance levels for hours or even days at a time. Throughout a trend, the
price may test either the support or resistance level, but if the price is to
stay within the channel, the support and resistance levels will be tested but
not broken through.
In the
inverse of what has been explained above, if a support or resistance level is
tested for hours or days without a breakout, and finally the price pushes
through the bounds of this channel, it may be regarded as a strong indication
that the price will take on an entirely new direction or trend.
Using
Support and Resistance to Trade:
Traders who
monitor support and resistance levels are looking for one of the following
trading opportunities:
- A buying
opportunity after the support level has been pushed but not broken several
times. The trader would most likely enter at the end of a strong bullish candle
that started with a touch of the support level.
- A buying
opportunity after a previously tested resistance level is finally breached by a
strong bullish candle. In other words, market buyers attempted and failed
numerous times to push prices above a resistance level. Finally, prices break
through in the form of a strong up-candle, indicating that buyers may finally
get their way and drive up the price.
- A selling
opportunity after a previously tested support level is finally broken with a
strong bearish candle. In other words, market sellers have tried and failed
numerous times to push prices below the support level. Finally, prices break
through in the form of a strong down-candle, indicating that sellers may have
finally gotten their way and pushed the price lower.
By
understanding and utilizing support and resistance levels in forex trading,
traders can potentially identify key buying and selling opportunities and make
more informed trading decisions.
