Finding support and resistance levels in forex trading are some of the most crucial and critical skills for traders. Moreover, almost all reliable trading strategies use support and resistance analysis to improve or determine their trading methods.
The two levels, support, and resistance develop around the key areas approached or rebound regularly by the price, making it highly essential for positive trading gains.
What are Support and Resistance Levels?
Support and resistance are price levels on a chart that traders use to find potential price opposition. They are also psychological levels that depict the varying attitudes of different market players, and their appearance on the chart limits the range of the market of movement. The levels base their movements to supply and demand.
If the number of sellers surpasses that of buyers, the price falls while it rises if the buyers are more than the sellers are. Price goes two ways when it meets the levels. It can either follow the horizontal price movement or bounce back to the opposite trend direction. Additionally, the price could also make a rapid move if the levels break.
Support and resistance levels make up the essential concepts that help traders analyze and understand the price patterns on the chart before taking any action. Moreover, they allow the traders to know when it is safe to enter and exit their trades, thus reducing risks.
A support level is a price on the chart that alerts traders that it is time to buy their currency pairs. The level indicates that the demand on the market is higher than the supply, with prices bouncing back up instead of falling. In short, the support level occurs when there is a downtrend pause due to the rising demand. On the other hand, resistance level occurs when an uptrend reverses due to supply surpassing demand.
How to identify support and resistance level
Spotting support and resistance levels is not complex, even for the most unskilled forex traders. Identifying them is crucial as it helps the trader to learn and understand the price movements in the market ad act accordingly.
The levels help prevent risks by allowing the traders to know when to put stops and limits to their trades. They also help them to know when it is safe to enter the market. There are several ways to identify forex support and resistance levels, but the following three are the most popular ones.
Past Price Patterns
One of the most reliable sources you can use to identify support and resistance levels of the current market price movements is studying past prices. Historical price patterns and charts, including the most recent price movements, could give the trader a picture of what to expect because the likelihood of the pattern changing is low.
However, this source is not 100% reliable because the historical price patterns could have been due to unavoidable circumstances.
Trendlines or Other Technical Indicators
Another way to identify support and resistance levels is by using trendlines or some technical indicators. Trendlines are easy to read and understand, and they show when there is an uptrend or a downtrend. During the uptrend, prices higher highs and high lows, while during a downtrend, they make lower lows and lower highs.
A trendline connects the high with the low, and an extension of the same shows you price potentiality alongside support and resistance levels. Trendlines provide traders with the best visual flow of the market irrespective of a downtrend or uptrend. They are also some of the best indications of what to expect with the price pattern in the future.
Using other technical indicators could also help identify support and resistance levels in the same way that trendlines do.
Past Support and Resistance Levels
Previous support and resistance levels could also make the perfect markers and indicators for future price movements and potential exit and entry points. When using this source for identifying support and resistance levels, it is crucial to note that they do not provide you with the most accurate figures.
In the majority of the cases, the markers will not hit the same price repeatedly before reversing. It is, therefore, safer to consider them more as support and resistance zones rather than levels.
Wrapping it up
Support and resistance levels are potent tools in forex trading. Many of the trading strategies have support and resistance analysis built into them, making them unavoidable. Price movements can either respect the support and resistance strategies or break out of the zones.
Therefore, it is crucial to know that using support and resistance trading strategies comes with risks, which is why you should limit losses by learning sound risk management.