Support and resistance are two terms that describe the price levels where the market tends to stop or reverse its direction. Support and resistance are based on the principle of supply and demand, which states that when the supply exceeds the demand, the price falls, and when the demand exceeds the supply, the price rises.
Support is a price level where the demand is strong enough to prevent the price from falling further. Support acts as a floor for the price, where buyers tend to enter the market and push the price up. Resistance is a price level where the supply is strong enough to prevent the price from rising further. Resistance acts as a ceiling for the price, where sellers tend to enter the market and push the price down.
Support and resistance are not fixed or exact numbers, but rather zones or areas where the price tends to bounce or reverse. Support and resistance can be horizontal, diagonal, or dynamic, depending on the trend and the time frame. Support and resistance can also change roles over time, meaning that a broken support can become a new resistance, and vice versa.
The main purpose of this blog post is to teach you what forex support and resistance are, how to find them, and how to trade them. By learning how to use support and resistance in your forex trading strategy, you can improve your chances of success and profitability in the forex market. In this blog post, we will cover the following topics:
- What are support and resistance in more detail
- How to find support and resistance levels
- How to trade support and resistance levels
Let’s get started!
What Are Support and Resistance?
Support and resistance are two of the most important concepts in forex trading. They are the price levels where the market tends to stop or reverse its direction, due to the imbalance between supply and demand.
Support is a price level where the demand is strong enough to prevent the price from falling further. When the price reaches a support level, it means that there are more buyers than sellers in the market, and the buying pressure is greater than the selling pressure. As a result, the price tends to bounce or rebound from the support level, as the buyers push the price up.
Resistance is a price level where the supply is strong enough to prevent the price from rising further. When the price reaches a resistance level, it means that there are more sellers than buyers in the market, and the selling pressure is greater than the buying pressure. As a result, the price tends to drop or retreat from the resistance level, as the sellers push the price down.
Support and resistance can be horizontal, diagonal, or dynamic, depending on the trend and the time frame. Horizontal support and resistance are the price levels that are parallel to the x-axis, or the horizontal axis. They are usually formed by previous highs and lows of the price, or by psychological levels such as round numbers. Horizontal support and resistance are easy to identify and draw on a chart.
Diagonal support and resistance are the price levels that are sloped or angled to the x-axis, or the horizontal axis. They are usually formed by connecting two or more points of the price, such as higher highs and higher lows for an uptrend, or lower highs and lower lows for a downtrend. Diagonal support and resistance are also known as trend lines, and they indicate the direction and strength of the trend.
Dynamic support and resistance are the price levels that change over time, depending on the price action and other factors. They are usually formed by technical indicators such as moving averages, Bollinger bands, Ichimoku cloud, etc. Dynamic support and resistance can adapt to different market conditions and provide more accurate signals.
Here are some examples of support and resistance levels:
- Horizontal support and resistance: In this example, you can see how the price bounced from a horizontal support level at 1.1700 several times, indicating a strong demand at that level. You can also see how the price dropped from a horizontal resistance level at 1.1900 several times, indicating a strong supply at that level.
- Diagonal support and resistance: In this example, you can see how the price followed an uptrend line that connected higher lows, forming a diagonal support level. You can also see how the price broke below the uptrend line, indicating a trend reversal. You can also see how the price followed a downtrend line that connected lower highs, forming a diagonal resistance level.
- Dynamic support and resistance: In this example, you can see how the 50-period moving average acted as a dynamic support and resistance level for the price. You can see how the price bounced from the moving average when it was above it, indicating a bullish trend. You can also see how the price dropped from the moving average when it was below it, indicating a bearish trend.
Finding support and resistance levels is one of the most important skills in forex trading. Support and resistance levels can help you identify the potential entry and exit points for your trades, as well as the risk and reward ratios. There are many ways to find support and resistance levels, but here are some of the most common and effective methods:
- Use historical price data to identify the areas where the price has bounced or reversed multiple times. One of the simplest ways to find support and resistance levels is to look at the past price action and see where the price has reacted strongly in the past. These areas are likely to act as support and resistance levels in the future, as they indicate a significant imbalance between supply and demand. You can use a line chart or a candlestick chart to spot these areas, and mark them with horizontal lines or zones.
- Use technical tools such as trend lines, moving averages, Fibonacci retracements, pivot points, etc. to draw support and resistance lines. Another way to find support and resistance levels is to use some of the technical tools that are available on most trading platforms. These tools can help you draw support and resistance lines based on mathematical formulas or calculations. Some of the most popular technical tools for finding support and resistance levels are:
- Trend lines: Trend lines are diagonal lines that connect two or more points of the price, such as higher highs and higher lows for an uptrend, or lower highs and lower lows for a downtrend. Trend lines indicate the direction and strength of the trend, and can act as support and resistance levels for the price.
- Moving averages: Moving averages are indicators that show the average price of a certain period of time, such as 10, 50, or 200 days. Moving averages smooth out the price fluctuations and show the overall trend direction. Moving averages can act as dynamic support and resistance levels for the price, as they tend to attract buyers or sellers when the price approaches them.
- Fibonacci retracements: Fibonacci retracements are indicators that show the potential retracement levels of a price movement based on the Fibonacci sequence, a series of numbers that have a special mathematical relationship. Fibonacci retracements can help you identify the possible reversal points of a price movement, as they tend to coincide with support and resistance levels.
- Pivot points: Pivot points are indicators that show the average high, low, and close prices of a previous period, such as a day, a week, or a month. Pivot points can help you identify the potential breakout or bounce points of a price movement, as they tend to act as support and resistance levels.
- Use psychological levels such as round numbers, highs and lows, etc. to locate potential support and resistance zones. Another way to find support and resistance levels is to use some of the psychological factors that influence the market behavior. These factors can create support and resistance zones that are based on human emotions or expectations. Some of the most common psychological factors for finding support and resistance zones are:
- Round numbers: Round numbers are numbers that end with zeros, such as 1.1000, 1.2000, or 1.3000. Round numbers are easy to remember and often used as target or stop levels by traders. Round numbers can create support and resistance zones that are difficult to break or cross.
- Highs and lows: Highs and lows are the highest and lowest prices that have been reached by the market in a certain period of time, such as a day, a week, a month, or a year. Highs and lows represent important turning points in the market sentiment and can create support and resistance zones that are likely to be tested or retested by the price.
- Previous support and resistance: Previous support and resistance are the support and resistance levels that have been broken or violated by the price in the past. Previous support and resistance can change roles over time, meaning that a broken support can become a new resistance, and vice versa. Previous support and resistance can create support and resistance zones that are likely to be respected or rejected by the price.
Here are some examples of how to find support and resistance levels using these methods:
- Historical price data: In this example, you can see how we used historical price data to identify some of the major support and resistance levels on EUR/USD daily chart. We marked these levels with horizontal lines or zones where the price has bounced or reversed multiple times in the past.
- Technical tools: In this example, you can see how we used some of the technical tools to draw some of the minor support and resistance levels on EUR/USD daily chart. We used trend lines (blue), moving averages (red), Fibonacci retracements (green), and pivot points (yellow) to draw these levels.
- Psychological factors: In this example, you can see how we used some of the psychological factors to locate some of the potential support and resistance zones on EUR/USD daily chart. We used round numbers (black), highs and lows (purple), and previous support and resistance (orange) to mark these zones.
Trading support and resistance levels is one of the most effective ways to profit from the forex market. Support and resistance levels can help you determine the best entry and exit points for your trades, as well as the risk and reward ratios. Support and resistance levels can also help you confirm the validity and strength of your trading signals, as well as anticipate the possible breakout or reversal scenarios. Here are some of the ways to trade support and resistance levels:
- Use support and resistance levels as entry and exit points for your trades. One of the simplest ways to trade support and resistance levels is to use them as entry and exit points for your trades. You can buy at support levels and sell at resistance levels, or vice versa, depending on the trend direction and market sentiment. For example, if you are in a bullish trend, you can look for buying opportunities near the support levels, and exit your trades near the resistance levels. If you are in a bearish trend, you can look for selling opportunities near the resistance levels, and exit your trades near the support levels.
- Use support and resistance levels as risk management tools for your trades. Another way to trade support and resistance levels is to use them as risk management tools for your trades. You can use support and resistance levels to set your stop loss and take profit orders, as well as to calculate your risk-reward ratio. For example, if you buy at a support level, you can place your stop loss below the support level, and your take profit near the next resistance level. If you sell at a resistance level, you can place your stop loss above the resistance level, and your take profit near the next support level. By doing this, you can protect your capital and maximize your profits.
- Use support and resistance levels as confirmation tools for your trades. Another way to trade support and resistance levels is to use them as confirmation tools for your trades. You can use support and resistance levels to validate and reinforce your trading signals from other sources, such as technical indicators, chart patterns, candlestick patterns, etc. For example, if you have a bullish signal from a moving average crossover, you can wait for the price to bounce from a support level before entering a long position. If you have a bearish signal from a head and shoulders pattern, you can wait for the price to drop from a resistance level before entering a short position.
- Use support and resistance levels as breakout or reversal signals for your trades. Another way to trade support and resistance levels is to use them as breakout or reversal signals for your trades. You can use support and resistance levels to anticipate and capture the price movements that occur when the price breaks or reverses from a support or resistance level. For example, if the price breaks above a resistance level, it indicates a bullish breakout that can lead to a new uptrend. If the price breaks below a support level, it indicates a bearish breakout that can lead to a new downtrend. If the price reverses from a resistance level, it indicates a bearish reversal that can end an uptrend. If the price reverses from a support level, it indicates a bullish reversal that can end a downtrend.
Here are some examples of how to trade support and resistance levels using these methods:
- Entry and exit points: In this example, you can see how we used horizontal support and resistance levels as entry and exit points for our trades on EUR/USD daily chart. We bought at the support level of 1.1700 and sold at the resistance level of 1.1900, making a profit of 200 pips. We repeated this process several times until the price broke out of the range.
- Risk management: In this example, you can see how we used diagonal support and resistance levels as risk management tools for our trades on EUR/USD daily chart. We bought at the uptrend line that acted as a dynamic support level, and placed our stop loss below the trend line, and our take profit near the next resistance level. We repeated this process until the price broke below the trend line.
- Confirmation: In this example, you can see how we used Fibonacci retracement levels as confirmation tools for our trades on EUR/USD daily chart. We used the 50% retracement level as a potential support or resistance level, depending on the trend direction. We waited for the price to bounce or drop from this level before entering our trades based on other signals such as candlestick patterns or moving average crossovers.
- Breakout or reversal: In this example, you can see how we used pivot point levels as breakout or reversal signals for our trades on EUR/USD daily chart. We used the R1 (first resistance) and S1 (first support) levels as potential breakout or reversal points, depending on the market sentiment. We entered our trades when the price broke or reversed from these levels with strong momentum.
Conclusion
In this blog post, we have learned what forex support and resistance are, how to find them, and how to trade them. We have seen that support and resistance are the price levels where the market tends to stop or reverse its direction, due to the imbalance between supply and demand. We have also seen that support and resistance can be horizontal, diagonal, or dynamic, depending on the trend and the time frame. We have also seen that support and resistance can be used as entry and exit points, risk management tools, confirmation tools, or breakout or reversal signals for our trades.
Support and resistance are very useful concepts in forex trading, but they are not foolproof or absolute. Sometimes, the price can break or ignore the support and resistance levels, or create new ones. Therefore, it is important to use support and resistance levels with caution and discretion, and to combine them with other technical tools and fundamental analysis.
Here are some tips on how to use support and resistance effectively in your trading strategy:
- Use multiple time frames to identify the major and minor support and resistance levels. The higher the time frame, the stronger the support and resistance level.
- Use multiple methods to find the support and resistance levels. The more methods that agree on a certain level, the more reliable the support and resistance level.
- Use price action to confirm the support and resistance levels. Look for candlestick patterns or chart patterns that indicate a bounce or a reversal from the support or resistance level.
- Use volume to confirm the support and resistance levels. Look for high volume when the price reaches or breaks a support or resistance level, as it indicates a strong market reaction.
- Use stop loss and take profit orders to protect your trades from unexpected price movements. Adjust your stop loss and take profit orders according to the support and resistance levels.
- Use risk-reward ratio to evaluate your trades. Aim for a risk-reward ratio of at least 1:2, meaning that your potential profit is twice as much as your potential loss.
We hope that this blog post has helped you understand and appreciate the concept of forex support and resistance. We encourage you to practice finding and trading support and resistance levels on your own or with a demo account. Thank you for reading!
