Support and resistance are a powerful tool for Forex trading
Support and resistance are a powerful tool for trading, and most business strategies are already relevant. Support and Resistance provides Forex with market orientation and trading opportunities. It is also one of the most widespread means of technical analysis in the financial markets, as it is possible to quickly identify three main moments of interest in the graphs of interest to each trader.
– What direction should be taken in trading with currencies
– Market entry timing
– Determining the moments of exit from the market in both profit and loss
Even though Forex is sometimes complicated, if the trader answers the three questions above, it is clear he has a basic idea of his trading. And by determining the levels of support and resistance, we can answer these questions. Their correct finding is also part of many strategies in the financial markets.
As can be seen on the chart above, support is the lowest price level below which a traded pair of currencies will not fall, and resistance is the highest price level that a traded pair will not exceed. If we consider the space between support and resistance behind the room in the house, the support will be a floor and a resistance ceiling. The traded pair of currencies will therefore move between these two levels until the moment of “breakthrough” in one direction or the other.
Theoretically, support is the price level at which demand (purchasing power) is so significant that it will prevent further price declines. The logic is as follows: The more the price approaches the level of support and gradually decreases, shoppers tend to shop with the prospect of a more profitable business. On the contrary, sellers do not want to sell because the hopes for good trade have worsened for them. Under this scenario, demand exceeds the offer, thus preventing the price drop below the level of support.
As can reasonably be expected, this situation of support will not last long. If the price falls below the level of support, it is clear that the seller is predominant over buyers. This distortion of support suggests that the mood between traders wishes to sell, not to buy. Once a breakthrough occurs in the support level, the trader can expect an additional level of support to be created at the place where the buyers are established.
On the other hand, resistance is the price level at which the offer (sales force) is so strong that it will prevent further price increases. The logic is as follows: The more the price approaches the level of resistance and gradually increases, the sellers tend to sell while the shoppers limit their purchases. Under this scenario, the offer exceeds demand, thus preventing price growth beyond the level of resistance.
As in the case of support, the state of resistance will not last long, and the break above the level of resistance shows that bulls (ie shoppers) prevailed over bears (ie sellers). Breaking resistance leads buyers to make purchases even at higher prices. Prices are rising and everything suggests that this trend will continue. Once the previous level of resistance is broken, the new level of resistance will be created at the level at which the seller is established.
In general, the longer the time is captured on the graph, the stronger the levels of support and resistance,the levels of support and resistance displayed on the daily chart will be more pronounced than the levels on the graph showing the development at hourly intervals.
From our brief introduction, it is clear how beneficial for every Forex trader is the right understanding of this issue. People who are able to accurately identify significant levels of support and resistance are more successful in identifying suitable opportunities and behave more confidently in managing their business.