For professional traders, the analysis of support and resistance levels in the foreign exchange market is a key component of the technical analysis. In forex trading, currency pair prices often consolidate within a horizontal trading range, it is therefore important that one knows how to take advantage of these support and resistance areas. Support and resistance form an important aspect of trading the forex markets. They are not constant and continue to change constantly as the market dynamics continue to change. Understanding support and resistance is an important concept in trading and it is essential for the trader to understand these concepts.
In their most basic sense, support levels denote prices that a currency will not likely fall below, while resistance levels indicate prices the currency will probably not exceed. By analyzing these key levels, investors can more accurately predict whether a current trend will keep going or, alternatively, reverse. Armed with this information, a trader can potentially find a price point to enter a position, or close a position, and place a stop or a limit.
When price meets such levels it could lead to a bounce in the opposite direction of the trend or to consolidations (horizontal movement of the price). Also, the level could be broken and the price could make a rapid move. Support and resistance areas are the zones where the interests of the market players intersect. The barriers caused by the resistance and support levels do not last forever and our job is to determine which levels we can trust and which have a high probability of breaking. This is not an exact science but with a proper understanding of the market and the use of some technical analysis, this method has very high odds of working.
Not all support and resistance zones are created equal. We are only interested in trading valid supports and resistances as measured by their authenticity and potential. There are weak supports and reliable supports. There are weak resistances and reliable resistances. As you probably guess, traders tend to stick with the more reliable levels, as they are more likely to point to a successful entry and exit point. The more reliable support and resistance levels are the ones, which are older and have generally been tested more times.
From a strategic point of view, support and resistance levels represent smart places to anticipate a reaction in the price of an asset and therefore represent a basic tool in technical analysis. Numerous traders use them, but the diversity in application and integration tell us that charting is definitely not an exact science and more of an art. One of the most common mistakes that new traders make is buying too close to a line of resistance or selling too close to a line of support. In this page we provide enough set-ups and real-time examples, to make sure you thoroughly understand this simple yet important dynamic.