When getting into forex trading, you are likely to come across the terms support and resistance often. The first represents an area where the price of an asset tends not to go down any further, and the second an area where the price tends not to go up anymore. However, there is so much more support and resistance beyond the simple definition offered above before you can begin to use them to make trading decisions on a chart. To begin with, to get the most out of support and resistance, you need to understand how asset prices typically move, and then you can interpret support and resistance from that framework. Another thing you need to keep in mind is that there are different types of support and resistance, such as minors and majors. Minor levels should be broken, while strong levels are more likely to hold and move the price the other way.
How to use trend lines
Support and resistance trading can be highlighted by horizontal or sloping lines called trend lines. If the price stagnates and reverses in the same price zone on two successive occasions, you can draw a horizontal line to show that the market is struggling to break above the zone. It can be support or resistance. Think of it as the floor and ceiling of the house; the lower part is the support, the upper part is the resistance. Once the resistance is broken, it becomes support, and the price can aim for the next level of resistance and vice versa.
Also, when plotting a chart, you can draw trend lines. For example, the price will make higher highs and higher lows in an uptrend. And in a downtrend, the price will make lower lows and lower highs. You can connect highs and lows during a trend. Then extend that line to the right and see where the price can potentially find support or resistance going forward. These are known as dynamic support and resistance lines and help identify trends, ranges, and other chart patterns. They give you an idea of how the market was going at that time and what might happen in the future.
Major and minor support and resistance levels
Minor support and resistance levels do not hold. For example, if the price is going down, it will bottom out, rebound and start falling again. This trough can be marked as a minor support zone because the price stalled and bounced off this level, but since the trend is down, the price is likely to fall through this minor support level without too much trouble eventually. . Minor support or resistance areas provide analytical information and potential trading opportunities. Using the example above, if the price breaks below the minor support level, you will know that the downtrend is still intact. But if the price stagnates and rebounds at or near the former low, then a range could develop. If the price stagnates and rebounds above the previous low, you could have a higher low, indicating a possible change in trend.
On the other hand, the main support and resistance areas are the price levels that have recently caused a trend reversal. If the price had an uptrend and then reversed into a downtrend, the price where the reversal took place is a high resistance level. When a downtrend ends and an uptrend begins, this is a high support level. When price breaks back into a major support or resistance zone, it will often have a hard time breaking through it and back the other way. For example, if the price falls to a strong support level, it will often bounce higher. The price may eventually break through it, but usually it pulls back from the level several times before doing so.
The most appropriate way to trade using support and resistance is to buy near support in uptrends or parts of ranges or chart patterns where prices are rising and sell/short near resistance in downtrends or parts of ranges and chart patterns where prices are moving. down.