Forex Trading Strategy – Basics Of Support and Resistance
When dealing with technical analysis, the concepts of support and resistance are commonly discussed and studied, and could be regarded as complicated by traders who are still learning to trade. In this article, I would like to point out the basics in order to simplify the complexities that surround these concepts. At the end of this article, you will be able to learn how these concepts are being used by traders to predict the potential market movements. In the picture below is a simple example of a chart that shows resistance and support:
True to most financial markets, the price of a stock, future, or currency is ultimately determined by supply and demand. To put simply, if there is an increase demand for supply then price will rise, and if the demand for supply drops then price will fall. Therefore, support and resistance are price levels where the supply and demand equation is expected to fluctuate.
Read more about Forex Trading Strategy Made Very Simple – Price Action
Forex Trading Strategy – Support
Support is the price level of a particular currency in the Forex market where there is enough demand which increments the price and prevents it from declining. In the chart below, it illustrates the strength of the base currency, the Euro, relative to the quote currency, the US Dollar.
Forex Trading Strategy – Resistance
Resistance is the price level of a particular currency in the Forex Market where there is not enough demand which decrements price and prevents it from rising.
Forex Trading Strategy – Support and Resistance in a Range Market
Source: Informed Trades
There are plenty of ways to determine support and resistance on the chart however the most basic way is to look for areas where the price has touched multiple times without breaking through that level (Refer to the above chart). With this Forex Trading Strategy, the more valid it is to determine whether it is a support or a resistance to be able to predict accurately the outcome of the trade.
Forex Trading Strategy – Support and Resistance in a Trend
Source: Informed Trades
In the example above, it shows a trendline of support and resistance. When the market is trending upward, resistance levels are formed as the price action slows and starts to pull back toward the trendline. This is because of selling or profit taking by traders. The resulting price action undergoes a plateau effect in price, creating a short term top.
On the other hand, when the trend of the marketing is declining, you should watch for a series of declining peaks and connect these peaks with a trendline. When the price is consistent with the trendline, most will be pressured to sell. It will therefore continue to decline as demand is decreasing.
Read more about Forex Trading Strategy: Price Action Trading Patterns
With the identified support and resistance levels, it helps in creating a strategic entry or exit points that will be in favor towards the trader’s profitability.
Bottom line is determining support and resistance when reviewing charts will help improve returns of short term investing because it could provide traders an accurate picture of the movements in price. Also, it helps long term investors to foresee possible hindrance to their long term investing by discovering a decline in the trend of a particular investment. It is definitely one of the Forex trading strategies to follow!
- The Basics of Support and Resistance in Trading. Retrieved April 08, 2013. http://informedtrades.hubpages.com/hub/The-Basics-of-Support-and-Resistance-in-Trading
- Support and Resistance Basics. Retrieved April 08, 2013. http://www.investopedia.com/articles/technical/061801.asp
- Support and Resistance. Retrieved April 08, 2013. http://www.babypips.com/school/support-and-resistance.html