3.2 Forex Support and Resistance Levels and Trading Strategies

 

As the market takes its course, support and resistance are crucial price zones that must be known to every trader. 

 

Support’ is an area where one can see buying emerging, and in enough volume to put a halt to the preceding slide in prices. 

 

Resistance’ is the reverse of support – a zone where rising prices meet a wall of selling orders, enough in volume to halt the uptrend.

 

A look at the chart below will make this clear:

 

Forex resistance and support levels explanation.

 

As you can see each wave of rising prices stops at a peak, and every selling bout stops at a trough. The peaks are marked in red and each is labeled ‘resistance’. Similarly, each trough is marked in green and labeled ‘support’.

 

The important thing to note that each of these points is a zone where buying or selling is concentrated. The selling in case of the resistance points (the peaks) causes the market to fall, and the buying at the support points (the troughs) makes the market rise.

 

Also note that these are not precise price numbers, but areas or zones where market psychology brings in a flurry of buying or a wave of selling. Often the market will flatter to deceive – it may show false strength and look like its going to blast through the selling orders (the resistance) but a few ticks above, will simply fall back. It may do this many times, because, remember, it is made up of millions of participants, and their collective psychology around that price point will create a zone that would form a resistance or support. 

 

Identifying, or plotting these zones

 

Examine a price chart and look for zones where the price has made a number of troughs or peaks. You may plot the support or resistance line approximately midway through these congestion zones.  A line through the peaks is a resistance line and one through the troughs is a support line. 

 

The above chart shows resistance and support zones during an uptrend and the other way to look at it is shown in the following chart:

 

Example of resistance and supports during a trend. 

 

You may also have plenty of chances to trade on the basis of resistance and support zones or prices when the market is not having a trend and is running sideways. Check out the following Forex chart for such a scenario:

 

Forex resistance and support levels example -1

 

One rule of thumb – mentally ‘average’ the closing prices of the congestion area – the figure you get is a fairly close approximation of the support or resistance price.

 

Also note one more very interesting fact. These guys (‘support’ and ‘resistance’) are Jekyll and Hyde - one can become the other, and back again!

 

Lost you there? Not to worry, time to look at another charts though this fact can be seen in the above chart as well:

 

Resistance turning into support for the currency pair.

 

Another example of Forex resistance turning ito support.

 

Let's have another example of a strong resistance after a months' long uptrend in the following Forex chart:

 

Example of strong resistance at the end of uptrend and failure of support.

 

Look at how prices wavered several times around the top of the uptrend. Emerging supply acted as a traffic light several times, and ultimately the price broke down into a decline. This was a ‘resistance’ zone – it’s marked R.

 

Now prices are merrily going downhill with everybody going short, but hey, it didn’t last long – a bulwark of buying came in at the zone marked S1. This was a ‘support’ zone. 

 

But look at the chart sometime later. At S2 you find another cluster of support prices.  But here’s the fun – S2 is more or less the same as R. So, did you see how a resistance became a support?

 

How to gauge the strength of the support or resistance?

 

One way to estimate the power of the support line is look at the volume that changed hands at that level. The higher the volume the greater is the potential of that zone to act as a support or resistance.

 

Another way is to look at the number of times the price has attempted to pierce (or ‘tested’) the level of support or resistance. Generally speaking, the greater the number of unsuccessful attempts,  the stronger is that zone of support or resistance.

 

How to trade with resistance and supports?

 

  • Identify resistance and support zones. As we mentioned above, most of the times these resistances and supports are not at exact price points but in a range or zone.

 

  • For buying, place a limit order a few pips above the identified support zone and put your stop-loss order a few pips below this support zone. If the market is moving in range then your profit taking target can be a few pips below the lower range of the resistance zone.

 

  • For selling, place a limit order a few pips below the identified resistance zone and put your stop-loss order a few pips below this resistance zone. If the market is moving in range then your profit taking target can be a few pips above the upper range of the support zone.

 

  • You will lose on some and win on some. But then that's what trading all about. What is important that a careful watch and support and resistance understanding could make you a winner more times than you lose.

 

We will learn how to put stop-loss and take-profit orders for trading with resistance and supports during trends in next lessons.

 

Practice makes perfect

 

Look at as many charts as possible and try to plot these zones. Then watch how the price moves and whether your zones were proved right. Gradually you’ll get the hang of it. 

 

One for the road

 

There are traders who trade just using support and resistance zones as their guiding lights. Say CHEERS before we go to the next lesson 

 
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