Support and Resistance Levels
Support and resistance levels in the forex market allow traders to understand the market direction and predict future prices to place successful bets. They help you identify key price trends when the market has a higher chance of stopping and changing direction. Buying near the support level and selling near the resistance level enables you to make substantial profits and minimise the possibility of losses and risks. Let's take a look at what support and resistance levels are:
What are support levels?
The support level in forex is the price at which the currency pair prices stop falling, change the direction and begin to rise. Hence, there are usually more buyers than sellers at this level. You can identify the support level by drawing a line adjacent to the lowest low prices for the time period you consider in the market. For example, you are trading EUR/USD and tracking its price history to identify the right price level at which you can enter the market. Over the past year, EUR/USD traded between $5 to $15 per unit. In the second month, the currency pair prices increased to $15, but the month after that, it fell to $5. In the 7th month of trading, it again went up to $15 per unit but fell to $9 in the 9th month. The 11th month saw an increase once again when the currency pair traded at $15 before falling to $12 in the next 31 days and finally ended up climbing back to $15 again. After analysing the market price trend for EUR/USD in the last year, you identify the support price at $5. This means that you can choose to place a buy order at $5 this year for the same currency pair to trade it at the lower end of the entire range. Placing the buy order at the support level enables you to maximise your profits through an increase in pricing.
What are resistance levels?
The resistance level in forex is the price at which the currency pair prices stop rising, change the direction and begin to fall. Hence, at this level, there are more sellers of the currency pair compared to the buyers. You can identify the resistance level in a forex market by drawing a line along with the highest high prices for the time period you consider in the market. For example, let's consider the same example that we talked about during the support price identification, with the EUR/USD currency pair trading between $5 and $15. The resistance price level is identified at $15. Hence, you can place a sell order at this price so that whenever the currency pair price reaches this level, your order is executed, and profits are maximised.
How to trade support and resistance levels?
You can trade support and resistance levels by placing long orders in an uptrend near to the support level and placing short orders during a downtrend near the resistance levels. When you are buying a currency pair near support, wait for the market to trade in a range to execute support and resistance trading and place an order right when the currency pair price moves above the high price point of the particular range. This price break is an uptrend confirmation that signals you that prices are now moving beyond the support level. On the other hand, when you are selling a currency pair near resistance, wait for the market to trade in a range and place an order right when the currency pair prices move below the low price of the particular range. This price fall is a downtrend confirmation that signals that prices are now moving below the resistance line.
- Stop-loss orders can be placed at a level below the support price while placing a buy order
- Stop-loss orders can be placed at a level above the resistance price while placing a short or sell order
- Profit target prices can be placed right under the support price while placing a buy order
How to draw support and resistance levels in a chart?
1. Consider historical prices
The first step in drawing support and resistance lines is to identify short-term support and resistance levels by considering currency pair price data for at least three months. To identify long-term support and resistance levels, consider currency pair price data for at least twelve months. After opening a chart with these data points, you can identify the highest (resistance) price level and lowest (support) price level after which the markets reverse.
2. Identify price zones
Identify a price zone where the currency pair prices have either not moved up after a weak temporary uptrend, not moved down after a weak temporary downtrend or signalled a sharp reversal price move.
3. Identify the same level price action zones
After identifying several price actions, consider at least three zones that are closest to each other at the same level. All the three price zones should not appear simultaneously and appear in decent time breaks because the larger the distance between these price zones, the easier it is to identify support and resistance lines.
4. Mark a horizontal line
Finally, connect these three price zones at similar levels with a horizontal line and compare it with the current market price. If this line is above the market price, it is considered the resistance level, and if the line is below the market price, it is considered the support level.
What is the difference between support and resistance levels?
The most significant difference between the support and resistance level is that the support level signals an uptrend reversal, whereas a resistance level signals a downtrend reversal. The prices do not fall anymore at the support level and start increasing thereafter. The prices do not rise anymore at the resistance level and start falling thereafter. The support price can also be termed as the price flooring (minimum or lowest price level), whereas the resistance price can be termed as the price ceiling (maximum or highest price level).
What is support and resistance reversal?
Whenever the current market price breaks the support or resistance level, both support and resistance take a role reversal. This means the support becomes a short-term resistance level and resistance becomes a short-term support level. Support reversal refers to a downtrend reversal at which the prices continue to fall and break the support price to form a new resistance level in the downtrend. Resistance reversal refers to an uptrend reversal at which the prices continue to rise and break the resistance price to form a new support line in the uptrend.
How do you determine support and resistance levels?
1. Analyse historical currency pair prices
Familiarise yourself with the historical price patterns of the currency pair to understand how support and resistance levels for that piacular currency pair form. This helps you recognise if the same support and resistance levels appear again.
2. Use technical indicators
Use technical indicators along with historical prices to identify current support and resistance levels. Trendlines and chart patterns are the easiest way to identify these levels as they clearly depict the currency pair's lower lows and higher highs in a particular period.
3. Historical support and resistance prices
At last, consider the historical support n resistance price levels to confirm if the current levels make sense. Since markets do not hit the same exact support and resistance level every time, trading close to the previous support and resistance level acts as a confirmation signal that helps you enter or exit a trade accordingly.
Top support and resistance level trading strategies
1. Breakout or pullback strategy
It often happens that after a long period of market uncertainty, the currency pair prices break out and start trending. Such breakouts can be identified right above the resistance level or below the support level. Trading with the breakout strategy allows traders to capitalise on the increasing market momentum in a particular direction that has the potential to start a strong market trend.
2. Range trading strategy
A trader can utilise the range trading strategy by trading between the support and resistance price level. Once traders identify the support and resistance level, they get a specific range between which they are able to trade with maximum profits and minimum losses. As soon as the price goes beyond the support price, traders long a position, and as the prices bounce off from the resistance price, they short a position.
3. Trendline trading strategy
The trendline trading strategy is one of the most popular support and resistance trading strategies as it utilises the trendlines to place profitable trades in the forex market. The trendlines are considered as the support or resistance levels by connecting two or more downtrend highs or uptrend lows. Whenever there is a strong market trend, the prices move beyond the trendline and move in the trend’s direction. This enables traders to place trades in the trend’s direction to maximise profits.
4. Moving average trading strategy
A trader can consider moving averages from any period of time that suits their trading plan and goals. For example, if you choose the 55 periods moving average, it will trend above the average market price as the resistance line. The market would then reverse, and the 55 periods moving average will become the support level. These trendlines can be used to make market decisions, especially during continued trends that are susceptible to break.
How do you identify strong and weak support and resistance?
Strong support and resistance levels can be identified in trend reversal areas. This means that if the currency pair trends higher than usual and hits a reversal, the reversal point is considered a strong resistance price. However, if the currency pair trends lower than usual and hits a reversal, the reversal point is considered a strong support area. Weak support exists during a downtrend as it would signal the downtrend ending, which is not likely to happen as prices ought to break below the support level when selling pressures increase. However, a weak resistance exists during an uptrend as it signals the uptrend ending, which is not likely to happen as the price ought to break when buying pressures increase.
What is the best indicator for support and resistance?
The Fibonacci Retracement is the best support and resistance indicator as the Fibonacci numbers (a series of numbers that is calculated by adding the previous two numbers like 0,1,1,2,3,5,8,13, etc.) are used to calculate entry, exit and target levels during strong market trends. It helps in identifying the low and high prices along with the level where retracement ends to form a new trend, enabling traders to plot the resistance and support levels through Fibonacci levels in the chart.
Make the most of support and resistance levels for successful trades
Support and resistance levels are key indicators to identify profitable entry and exit points in the forex market. With our platform, you can study several charts and utilise the support and resistance trading strategies to place successful forex trades in the market. Sign up for a live trading account or try a risk-free demo account.
Frequently Asked Questions
How to find support and how to find resistance levels?
The lowest low in a downtrend is always the support level, and each lowest high is the resistance price. However, each highest high in an uptrend is the resistance level, and each highest low is the support level.
How do you determine powerful support resistance?
The most powerful support and resistance are determined whenever there is a market trend reversal. Whenever a downtrend ends and an uptrend starts, it is a powerful support level, and it is a powerful resistance level when an uptrend ends and the downtrend starts.
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