One of the most commonly used concepts in forex is support and resistance. Everyone has their own way on how one should measure support and resistance. Let’s consider the basic concept...
When the overall line is going up, the zigzag pattern is on an upward trend. When the market moves up and then pulls back, the resistance is the highest point reached before it pulls back. The lowest point reached before the market pulls back is the support. The forex market oscillates over time, so support and resistance are constantly formed. The opposite is also true for the downtrend.
Levels of support and resistance are not exact numbers. The market has a way of testing support and resistance levels, often times they appear broken. These ‘tests’ are usually represented by candlestick shadows.
When the price goes below a certain price (often more than once), but generally stays above it, the shadows are testing the support level. It may look like the market was ‘breaking’ support, but in reality it was just testing it.
Although there is no definite answer to this, some say that if the market can actually close beyond that level, then the support or resistance level would be considered broken. However, that is not always the case...
Sometimes, even after the price had closed below the support level, it can end up rising back above it. If you would have sold this pair believing that there was a real breakout, you would of lost money.
It helps to think of support and resistance as zones rather than concrete numbers. Line charts are a good way to find these zones and plot support and resistance levels. This is because line charts only show the opening and closing prices, while candlestick charts also show the extreme highs and lows.
Intentional movements are the only thing you should be plotting when dealing with support and resistance levels. Reflexes in the market can be very misleading. Look for areas where you see the price forming several peaks or valleys, and plot your support and resistance lines around those areas.
Other key things to remember when dealing with support and resistance are listed below.
The most common form of technical analysis in forex trading are trend lines. It is vital to draw them correctly, because many forex traders don’t. Some traders attempt to try and make the line fit the market, when it’s supposed to be the other way around.
The trend line is drawn along the top of easily identified resistance areas (peaks) in a downward trend. In an upward trend, the line is drawn along the bottom of support areas (valleys).
3 Types of Trends
Other Important things to Remember with Trend Lines
Channels are created when parallel lines are drawn at the same angle of an upward or downward trend. They are a technical analysis tool that help determine good places to buy or sell in the market. The tops and bottoms of channels show potential areas of support or resistance.
Draw a parallel line at the same angle as an uptrend line, and then simply move that line to position where it touches the most recent peak to create an up (ascending) channel. Do this at the same time you make the trend line.
Draw a parallel line at the same angle as the downtrend line, and then simply move that line to position where it touches the most recent valley to create a down (descending) channel. Once again, do this at the same time you make the trend line.
Buying areas can be pointed out when prices hit the bottom trend line. Selling areas can be pointed out when prices hit the upper trend line.
3 Types of Channels
Important Things to Remember
It is a common mistake for retail traders to set their trades directly on support and resistance levels, and then wait for their trades to materialize. It may work at times, but you are assuming that either level will hold without the price actually getting there yet.
We want to tilt the odds in our favor when using the bounce in order to find some kind of confirmation that the support or resistance level will hold.
Wait for it to bounce first before entering, instead of buying or selling right from the get-go. This allows you to avoid moments where the price moves fast and breaks through support and resistance levels.
When support and resistance levels give way, they break. There is the aggressive way to play breaks and the conservative way.
The Aggressive Way
The Conservative Way