Support and Resistance Levels
This is one of the most widely used concepts in Forex trading and it refers to levels on a chart that tend to act as barriers that prevent the price of an asset from getting pushed beyond a certain point in a particular direction.
This learn support and resistance levels tutorial will explain the technical analysis of Support and Resistance Levels and give examples of Support and Resistance Levels on forex charts.
Support Levels
This level prevents the price of an asset from getting pushed downwards and therefore it is regarded as the floor because it prevents the market from moving downwards past a certain point.
Example of Support Level on Forex Chart:
On the forex trading example below you can see that price moved down until it hit a support
Once price hit this level it slightly bounced back up, then resumed going down until it hit the support again.
This process of hitting a level and bouncing back is called testing the support level.
The more times a support is tested and the market bounces up the stronger this support level is - the example below this support level was tested three times without breaking. Finally the market trend reversed and started moving in opposite direction.
Once a this support level has been determined traders use it to place their orders to buy the currency at the same time putting a stop-loss a few pips below it.
In the example above the market did not move below this area. It is an area where price of the currency cannot break lower.
These regions form good points where a currency in a downward trend is likely to reverse and get support and start moving upwards.
The demand to buy the currency pair at this point will be greater & therefore providing a good point to begin a buy trade, while placing stops some pips just below this support level.
This support level is also use by short sellers as a target where to set their take profit forex orders for their short sell trades.
This is another reason why the trend is likely to reverse or consolidate at this level because once the sellers close their sell forex trades then momentum of the downward forex trend reduces and a forex price consolidation will happen after which the direction of the trend is likely to reverse.
Resistance Level
This level prevents the price of an asset from getting pushed upwards these levels are therefore regarded as the ceiling because these levels prevent the market from moving upwards
Example of a Resistance Level on Forex Chart:
On the forex trading example below you can see that price moved up until it hit a resistance level.
Once price hit this resistance level it retraced slightly the resumed going up until it hit the resistance again.
The resistance level holds and is tested five times without breaking.
The more times a resistance level is tested the stronger the it is.
Once this resistance level has been determined traders put their orders to sell at this level & at the same time putting a stop loss a few pips above it.
In the example above the market did not move above this area. This region shows an area where price of the currency cannot break above.
These levels form good points where a currency in an upward trend is likely to reverse after some resistance and start moving downwards in opposite direction.
This shows that the demand to sell the currency pair at this region will be greater & therefore providing a good point to begin a sell trade, while placing stops some pips just above this resistance level.
This resistance level is also used by buyers as a target where to set their take profit forex orders for their bullish trades.
This is another reason why the trend is likely to reverse or consolidate at this level because once the buyers close their sell forex trades then momentum of the upward trend reduces and a forex price consolidation will happen after which the direction of the trend is likely to reverse and start moving down.
