In forex trading, support is where the price tends to stop falling. On the other hand, resistance is where the price tends to stop rising. However, it is not advisable to make trading decisions on the basis of such ambiguous definitions since it can lead to depletion of your trading account.
Making use of support and resistance effectively requires that you first understand the typical movement of asset prices. This will be instrumental in assisting you to understand support and resistance from such a framework. It is worth noting that there are diverse types of support and resistance. This include minor and major/strong.
The minor levels are expected to be broken, with strong levels being expected to hold and result in price moving in the other direction. With this information, you will be in a position of making better decisions on the basis of support and resistance.
Support and resistance areas are zones where the interests of the market players meet at an intersection. It is similar to the ‘Tug of War’ where two opposite teams are pulling a rope over a mud wet patch. The weaker team will definitely lose and end up in a mud puddle.
In forex trading, the bulls and bears fight for domination in the market. While some traders believe that a forex pair will go up, others on the other hand believe it will go down. This leads to a clash between sellers and buyers. The prevailing side pushes the pair in their respective direction. Support and resistance are therefore indispensable in any price action trading strategy.
Finding support and resistance levels
Both support and resistance levels are not difficult to find on the forex charts. Each bottom on the chart is a potential support, while every top is a potential resistance. When the price drops to a level and then goes back up, it is an eventual point. Any subsequent times the market gets to such a level, it is likely to find opposition.
In case the price bounces again from this level, then there is a confirmation that it is a support level. In this case, we assume that the price is likely to bounce off this support again in case of another drop. The same is applicable for resistance levels.
It is usually not possible for all support and resistance zones to be equal. It is only advisable to trade valid supports and resistances based on their reality and potential. Just as there are weak supports and dependable supports, so do we have weak resistances and reliable resistances.
How to trade support and resistance
One of the common ways you can use in support and resistance is to trade key levels by simply trying to go with the market flow after the price has shown its bias towards a support or a resistance level.
It is therefore advisable to buy when the price approaches a support and starts to bounce in bullish direction. Again, you should sell when the price touches a resistance and starts bouncing in bearish direction. You can also buy when the price breaks resistance and sell when it breaks support.
It is advisable to stay in the market until the prices reaches the next vital support zone. Once this happens, close your position. This is also a signal to open the opposite position. Over and above, it is important to use a combination of support and resistance with other confirmation tools to help you as you make trading decisions.
Trading off support and resistance require a lot of practice. It is important that you work on isolating trends, ranges, and chart patterns in addition to support and resistance in your demo account. You should practice taking trades with targets as well as stop losses. It is only once you have gained confidence through profitability for a considerable period of time with your support and resistance trading method should you consider trading real money.