In this educational section, we want to further discuss the concept of support and resistance including its effectiveness behind each analysis. This article aims to increase understanding and develop every trader’s implementation of the theoretical concept built behind support & resistance analysis.
We’ll also share various market signals which can generate greater trade positions when combined with the support and resistance theory.
Most traders have heard about what support and resistance lines are for and how to spot them on a forex market chart. But, there are only a few who truly understand their purpose and how much potentials it has for every trader.
At the end of this article, you will be able to integrate trade setups that will provide great potential and help you identify the entry and exit points in a trade.
To remember how support and resistance works, let us imagine a newly-baked pie. Pulling that pie out of the oven will cause great pain due to the hotness of the muffin pan. The first reaction is to pull out your hand away from the hot pan and to wait for some time on attempting to pull it out again. Upon the second attempt to pull out the pie, you’ll become more cautious and will initially check if the muffin pan is still hot.
Like the pie scenario, forex market prices react on the hot zones. Let’s say on an AUD/USD currency pair if prices approached a peak where it’s too hot to handle, trying to hold on to the hot zone of the market will only burn you down.
Looking at the graphic above, rather than coming back down on the “not too hot to handle” level, the market may go higher and continue to move away.
Mostly, the market price pauses to decide where to move in once the currency pair reached their level of strong psychological or technical importance. Usually, on a major trend, the market price ends when they meet the resistance on the areas of peak spots.
Resistance zones are unique wherein when they broke into the ceiling spot, they will become the new support level on the market price. The same happens to the support zones as they will become the new resistance level once the price broke under the support spot. Looking at the sample chart above, zones marked by the red line represent the support level becoming the resistance level.
The complexity of support and resistance:
Support and resistance levels are very much visible in various time frames and markets. These levels aren’t just particular on a single market chart or currency pair.
On the sample chart above, the red line is the resistance area for this currency pair market. There are three specific marks where the price attempted to break out the resistance level but failed to do so. Because of the strength of the resistance line, traders can soon expect that these market will provide a strong support level if the price breaks above the resistance level.
Analyze the chart below.
An important idea to keep in mind about the support and resistance levels is that they make spot memories on currency pairs. Strong support and resistance levels stay on a specific currency pair chart for a long time. Market price could approach the next spot levels either in a week or a year.
Forex market is dynamic.
Not all educational articles about support and resistance levels will say it directly, but these levels aren’t always 100% effective. Both levels do not always influence the market. There are other aspects of delivering the market price towards support or resistance levels without delay.
Looking at the example chart above, the currency pair market price did not pause at any moment. It went straight like it has no importance at all. This type of scenario confuses forex traders because of their assumption that once a price reached a support or resistance level, it will bounce away.
Support and resistance levels will help develop trader’s odds by analyzing the various probable outcome, however, always remember that there is no way that these levels guarantee a 100% success. Winning in a forex trading needs more effort in creating a strategy that will maximize the chances to win.
Support and resistance’s effectiveness on Forex trading
Trade triggers should be integrated to take the advantage opportunity of a support and resistance levels. Learn various effective strategy combinations that work well on support and resistance.
Now that we’ve stated facts that support and resistance aren’t 100% accurate predictions, what makes them essential to forex market trading? The answer is to not focus on executing the trade every time a support or resistance level appears. Traders need to mark the number of times when support or resistance provided a good entry point and have risk management to gain reasonable profit at those times. It isn’t that important how the currency pair reacts every time it goes near the support or resistance levels. It will be better to create rules in scenarios that will make traders profit more on the winning trades than lose on the losing trades.
Being a successful trader doesn’t mean that you need to win every single trade. There will always be a certain downfall, but losing big time is a mistake committed by a trader who doesn’t properly take advantage of planning setups. With proper forex market analyzing, the odds of gaining success increase and future risk management performance develops.
There are various ways to indicate if a price reacts to either support or resistance levels. In our future posts intended for experienced traders, you’ll learn that those methods are very much effective within the forex trading market.
Integrating support and resistance
Before going through the strategies that we will share with you, we’ll discuss the proper way of indicating and outlining the support and resistance zones on the forex market chart.
Support and resistance levels are relevant to any time frame. But both levels become more relevant on higher time frame charts. The forex strategies discussed in this post don’t present setups on a higher frequency, it will be best to learn them on a smaller time frame charts (a 15-minute or 30-minute time frames).
There are 6 best practices or rules on indicating proper support and resistance levels.
Support and resistance levels are zones and not specific points. Better expect that the market price will go to a reverse general area. Currency pair market price doesn’t turn around instantly. The movement on resistance levels could easily range to 30-40 pips in size. The higher the time frame used to indicate support or resistance levels, the more resistance could be found in that area. But a 4-hour chart time frame will provide more influence than the one based on a 15-minute chart time frame.
Don’t rush and wait for the confirmation of the market price reversal before executing a trade entry point. This doesn’t mean that you have to make an entry when the market price hits the support or resistance levels. Take time and look for the signal that the price is reversing before executing an entry position.
It is best to have an indicating signal that will let you know when will the price go back towards the support area. Candlestick chart will best provide the visual of the indicating signal in the forex market.
Rather than spotting where the resistance level is, you can use a solid thick line available on any forex trading charting platforms. Check on the various positioning and find where it visually fits in the forex chart.
Find the best fitting curbs for your marking line. Look at the example below.
Look at the various forex chart and their styles and develop your analyzation skills.
Look for the support and resistance levels. Discover zones that don’t only exhibit the characteristic of a support or resistance but also show a potential to act as both.
Find support and resistance zones that show both reversal outcome to overlap their initial position. Those are the best lines for they show great strength on either side.
Best support and resistance levels are ones which are around for a long time. They become better and stronger when they age.
Those lines are helpful in signaling when the currency pair price approaches an area which has not traded for a long time.
If the support or resistance lines is old, it doesn’t mean that it is out of date. The older the lines are, the more the support and resistance levels are essential in the forex market.
Have fun and don’t limit your strategies and ruling. We have provided you rules that are proven effective by skilled majority traders. Best success comes to those who aren’t afraid to fall and never surrenders.
Create simple rules and strategies to integrate on your every trade. Continue implementing them and later on develop them to adapt in the never-ending changes that may occur in the forex market.
When you feel the need to modify these rules into fitting your trading style, don’t be afraid to do so.
Get the latest economy news, trading news, and Forex news on Finance Brokerage. Check out our comprehensive trading education and list of best Forex brokers list here. Subscribe now and receive FREE updates on the market today!