To your question what is support and resistance, we can answer as follows. Support and resistance in forex is one of the most used techniques.
This is because it is one of the most powerful tools to use in trading.
Before we move on to the basics, you need to understand that everyone has their own idea of where and how resistance and support was formed.
Strange as it may sound, we will show you examples later in the article. But now we start with information for beginners to forex trading.
Unlike most websites and videos on youtube, here we will give you examples drawn on the chart of a particular traded instrument.
If we look at the image above we can see the uptrend (bull market) ,the price of the currency pair EURUSD rises.
On the chart we have marked the tops and the bottoms which are the support and resistance.
When and how is the resistance drawn?
When the price rises and begins to turn, it draws a peak, which in our case means resistance.
These price peaks that outline the resistance show that there will be a surplus of sellers at this level.
When and how is support drawn?
As we can see in the image, when the price has already crossed the top (resistance) it makes a correction (draws the bottom).
And when the price goes back up, that bottom becomes support.
These levels of support alert us that we have a shortage of buyers.
Over time, the price constantly draws resistance and support as it moves up and down. They are formed both in an uptrend and in a downtrend.
The same rules for support and resistance apply to a downward movement.
Here is an example of support and resistance in a downtrend. On the image above we can see a very good (bear market).
How and when to look for support in a downtrend.
As we can see the price moves lower and draws the bottom, and thus marks the support.
Here we understand that there are no more sellers at this point and it is time for the buyers, thus they draw a new peak which is a correction.
How and when to look for resistance in (bear market).
When the price starts to draw this peak, resistance is formed there, and the sellers take over again. In this way, the price draws, highs and lows – resistance and support in a downtrend.
Support and resistance are one of the strongest weapons in forex trading. As we saw from the two images, we have drawn our resistances and supports in red and green rectangles (so-called levels). We can detect these levels with trend lines, but we will give examples with trend lines in the following videos and articles.
If you feel a little confused, don’t worry, in the following examples we will look at good moments to enter positions.
Here are some examples of how to trade support and resistance, or how to make money using these important levels?
Levels of support and resistance in forex.
The first and most important thing to remember is that resistances and supports are not exact numbers.
In some of our examples, we will show you how levels of resistance and support seem to be broken, but you will find that the market has just tested them.
In the image we can see how the price of the currency forex pair AUD USD tested three times the level of support. Notice how the candles test the price 0.7658. If we look at the beginning of the image we can assume that the price has broken this level 0.7658.But if we look at the whole picture we can see that the market has just tested this level.
And here we can ask the question, how can we know if the levels of support and resistance have been tested or broken?
Take a good look at how the price tested the level of support with the taillights. In this image we have also given an example of determining support with a trend line.
Although some of the tails test this area, you can see how one of the tail passes under this support area. Here, some forex traders can already say that this level has been broken.
The price went once below 113: 83, but then came back and continued up.If you had sold then you would have made a loss because the price has tested the level of support and has continued to rise.
If we look closely we can see that the support has not been broken. For a break of support and resistance, we will talk in the following articles and videos. There we will give you good examples of broken levels and tested areas.
Here we need to understand one important thing, if the price is pushed away a second time, or a third time from a zone of support or resistance, then this zone becomes stronger, because the price does not have the strength to break it.
In order to filter out these false breakouts, we should think for the support and resistance as “zones” and not as exact numbers.
How to trade supports and resistances properly?
It’s a million dollar question, but we’ll give you some valuable advice on how we trade support and resistance, and when we have a broken level, and when we’ve just tested it.
On the graph we can see how we drew a tested level. Here we must remember one thing that the more times a level is tested, the stronger it is.
Here on this photo we can see other moments of support and resistance, both strong and weak. We can see how the market is rising, making new Supports and resistances.
As the price rises, it breaks through any previous resistance and draws a new one until it reaches resistance with several peaks.
There, the price tests this level several times, (as we have said so far, the more a level is tested, the stronger it is) there we can only start looking for sell positions, because the market is weakening, sellers prevail.
The more often the price tests a level of support or resistance without violating it, the stronger the zone of support or resistance.
/ Here is one last piece of advice from us. if a level of support and resistance is broken, it is good to wait for a retest at that level to look for a position. /
In the next articles, we will introduce you to trend lines and their strength. We will show you how you can determine the trend, as well as support and resistance, and which trend line has more power in determining the trend and opening positions.