Support and resistance
Support and resistance is a VERY POWERFUL tool that you must master if you wan't to succeed with your Forex trading. It is used by almost any successful trader including banks and governments. Support and resistance lines are applicable to any currency pair, any timeframe and any market. It has been used for ages and will be used for a long time, so I guess it's time for you to learn it aswell.
What makes the price to move?
If the demand for EUR is increasing then EUR/USD most likely will go up. If the demand for USD is increasing or the supply of EUR is increasing then EUR/USD most likely will go down.
Support and resistance is about finding those levels where for example EUR/USD has it's turning points.
What is support?
Support is a level where demand is strong enough to keep the currency pair from going down any further.
When the price is falling towards the support, buyers are more and more interested to go long. At the same time sellers are more and more interested in selling. Let's take EUR/USD for example:
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Look at the support line (green), when price falls towards the the support line EUR/USD speculators think it's a good price and they enter long. Those who are long in USD/CHF for example (Which is almost a mirror of EUR/USD) think they have made good profits and closes their positions. Suddenly we have a VERY BIG DEMAND of the EUR/USD and you see what happens. It totally explodes upwards and those who are Long in EUR/USD make nice profits. |
What is resistance
Resistance is a level where supply is strong enough to keep the currency pair from going up any further. You can see it as the opposite of support. When price is climbing towards the resistance line the buyers think they had enough profit, and the sellers wan't to join.
Remember what I wrote above about the USD/CHF, it's almost a mirror of the EUR/USD. Below is a picture how the USD/CHF looks like at the same period as the EUR/USD above.
See how it looks like the EUR/USD, but the opposite? Look at the resistance line (green). When price reaches the line, the traders who are long USD/CHF think they have enough profit and closes their positions. At the same time EUR/USD speculators buys EUR/USD which leads to a drop in the USD/CHF and a climb in EUR/USD. It's important to know that most currency pairs are connected in one way or an other.
Resistance to support and vice versa
If you have spotted a nice support or resistance line, it gets even more powerful if it once have been the opposite. A resistance turns to a support or a support turns to a resistance. It's not always clear levels at one exact price. Support resistance lines are not exact science so we need to look at them as areas.
See picture:
How to find support and resistance levels
It's nothing you can learn on any page. It's something you have to learn by your self. The easiest way to learn is to pick up a daily chart of your favourite pair. Try to find levels where the price has bounced three or more times. After you have plotted the line, zoom in to the 4 hour timeframe or 1 hour timeframe and be amazed. You will see the price bounce many many times. Because if it does, you have spotted your first support or resistance line.
You should always try to find lines from higher timeframes than you are trading, because the support/resistance lines become more and more powerful the higher timeframe they come from.
Great job! You have read about one of the most important technical analysis you need to know, now practice. If you have a chart and need help finding those line, please contact us at contact@freeforexguides.com and we will do everything to help you.
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