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:

  1.  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.
  2.  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.
  3.  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.