Understanding Support and Resistance in Forex
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Support and resistance are powerful trading pillars, and most methods incorporate some form of support/resistance (S/R) analysis. Support and resistance usually form around critical regions where price has repeatedly advanced and recovered. In this article, we define support and resistance and discuss the most effective trading tactics of support and resistance.
What is Support?
In support trading, the price has dropped to a support region but has been unable to break below it. It suggests how price lowers to the support area and then 'bounces' violently away from it.
Support, in theory, is the price level where demand (purchasing power) is strong enough to keep the price from falling anymore. The idea is that as the price approaches support and becomes lower, customers know a greater offer and will probably buy it. Since they are getting a worse deal, sellers are less willing to sell. Demand (buyers) will outnumber supply (sellers) in that circumstance, preventing the price from going below support.
What is Resistance?
This trading pillar is defined as an area where price has increased but has struggled to breakthrough. It demonstrates how cost increases to the resistance area and then "bounce" violently away from it.
The price level at which selling power (supply) is relatively high to prevent the price from climbing further is referred to as resistance. The logic behind this is that as the price approaches resistance and becomes more expensive, sellers will be more willing to sell, and buyers will be less likely to buy. In that case, supply (sellers) will outnumber demand (buyers), preventing price from rising over resistance.
Useful Tactics for Support and Resistance Trading
- 01 – Range Trading
Traders seek to purchase at support and sell at resistance in range trading, which occurs in the zone between support and resistance. Consider the space between resistance and support to be a room. The floor is the support, while the ceiling is the resistance. In sideways trading environments where there is no clear sign of a trend, ranges tend to form.
- 02 – Breakout Tactic
It is common for prices to break out and begin trending after a period of directional uncertainty. Traders frequently watch for such breakouts below support or over resistance in order to profit from the momentum's continued increase in one direction. This momentum has the ability to launch a new trend if it is strong enough.
On the other hand, top traders trading with hot forex tend to wait for a pullback (towards support or resistance) before committing to a trade to avoid falling into the trap of trading the false breakout.
- 03 – Trendline Strategy
The trendline strategy is used as support or resistance in the trendline approach. All you need to do is connect two or more highs in a downtrend by drawing a line. In a strong trend, price will bounce off the trendline and continue to move in the trend's direction. As a result, for higher-probability trades, traders should only seek entries in the trend's direction.
George is the Chief Market and Broker Analyst at brokertested.com. Prior to being recruited by brokertested.com, I served SVS Securities as Chief Market Analyst for two years. Earlier, he joined Morgan Stanley in Nov 2013 as Research Analyst.
George is a well-rounded financial services professional experienced in fundamental and technical analysis, global macroeconomic research, foreign exchange and commodity markets and an independent trader.