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Forex Trading Strategy – Basics Of Support and Resistance

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:

support-resistance-basics

Source: Babypips

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.

SupportSource: Fxstreet

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

Support and Resistance

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

Support and Resistance

 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!

Source:

  • 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

Breaking through Dynamic Support and Resistance

Breaking through Dynamic Support and Resistance

From the previous article, it has now become clear that moving earnings could possibly behave as support and resistance.  By mixing a few of them creates what we call the zone. But it’s also wise to know that they’ll break, as with every support and level of resistance!

Let us visit again the 50 EMA on GBP/USD’s 15-min chart.

Dynamic Support and Resistance

Within the chart above, we have seen the 50 EMA held like a strong level of resistance for some time as GBP/USD frequently returned off it.

However, as we have outlined with the box, cost finally broke through and increased. Cost then retraced and examined the 50 EMA again, which demonstrated to become a strong support level.

So this means that moving averages may also behave as dynamic support and resistance levels.

One thing to remember about  using moving averages is the fact that they are always changing, meaning you can easily let it rest in your chart and do not have to keep searching in time for you to place potential support and resistance levels.

 

You will know that the line probably represents a moving market. The only issue obviously is determining which moving average to make use of!

Dynamic Support and Resistance

Dynamic Support and Resistance

Aside from determining the trend, another use of moving averages is to use them as dynamic support and resistance levels.

We name it dynamic because it is not like the regular horizontal and resistance lines. As the word dynamic suggests, it is constantly changing, reacting to recent price changes.

Traders use these moving averages as support and resistance, that they will buy when price goes down and tests the moving or they will sell as price rises and touches the moving average.

Below is an example of a chart for GBP/USD with 50 Exponential Moving Average:

Dynamic Support and Resistance

From the chart above, we can see that every time the price nears the 50 EMA, it is working as a resistance and the price goes back down.

Note that this doesn’t happen all the time. Sometimes, price may go up your EMA line before it goes back down and follow a trend.

There are even instances that the price will go all the way up, intercepting your EMA line. This is why some traders plot two moving averages. They only buy or sell when price is within the space the two moving averages create.

Here’s an illustration:

the Zone

You can see that the price went above the first EMA line but went down afterwards. During the times the price is inside the two horizontal EMA lines, as we call it “the zone”, this is the best time to buy or sell.

Summary: Support and Resistance

Summary: Support and Resistance

Support and resistance

Once the market moves up after which pulls back, the greatest point arrived at before it pulls back has become resistance.

Because the market continues up again, the cheapest point arrived at before it increases back has become support.

One factor to keep in mind is the fact that horizontal support and resistance levels aren’t exact amounts.

That will help you remove these false outbreaks, you need to think about support and resistance much more of as “zones” instead of concrete amounts.

One method to assist you in finding these zones would be to plot support and resistance on the line chart as opposed to a candlepower unit chart.

Another factor to keep in mind is the fact that when cost goes through a level of resistance, that resistance may potentially become support. Exactly the same may also happen having a support level. If your support level is damaged, it might potentially be a level of resistance

Trend Lines

Within their most fundamental form, an uptrend lines are attracted along the foot of easily identifiable support areas (valleys). Inside a downtrend, the popularity lines are attracted along the top easily identifiable resistance areas (peaks).

You will find three kinds of trends:

  • Uptrend (higher lows)
  • Downtrend (lower highs)
  • Sideways trends (ranging)

Channels

To produce an up (ascending) channel, simply draw a parallel line in the same position being an uptrend line after which move that line to put where it touches the newest peak.

To produce a lower (descending) channel, simple draw a parallel line in the same position because the downtrend line after which move that line to a situation where it touches the newest valley.

  • Ascending channel (higher highs and higher lows)
  • Descending channel (lower highers and lower lows)
  • Horizontal channel (ranging)

Buying and selling support and resistance levels could be split into two techniques: the bounce and also the break.

When buying and selling the bounce you want to tilt the chances within our favor and discover some kind of confirmation the support or resistance holds. Rather than simply purchasing or selling quickly the softball bat, wait for this to bounce first before entering. Using this method, you avoid individuals moments where cost moves so quick it slices through support and resistance levels just like a knife slicing through warm butter.

For buying and selling the break, there’s the aggressive way and there’s the conservative way. Within the aggressive way, you just purchase or sell whenever the cost goes through a support or resistance zone effortlessly. Within the conservative way, waiting for cost to create a “pullback” towards the damaged support or level of resistance and enter after cost bounces.