Support and resistance are technical analysis tools of the forex market. These help traders in analysing the price fluctuations easily and thus, deciding on the investments. Support is the floor that holds the prices, occurring while the falling prices stop and change their direction towards an increasing trend. In contrast, resistance is just the opposite of support; it is the change in the direction of increasing prices towards fall. Also, referred to as the ceiling, thus ceasing the upward movement of prices.
The levels of support and resistance are always different depending upon the forex market situations. If support and resistance break at any level, then there is the next level of support and resistance where the prices continue to move.
They aid in identifying the price changing points, therefore an effective strategy for price movement analysis.
Defining Support and Resistance
What is support and resistance? This is the first question that crosses our mind when we listen to its use in the forex market. So, we have defined both the terms straightforwardly for easy understanding of the investors or traders.
Support is the price level change where the downtrend is expected to pause due to a mass increase in demand for security. For example, if the price of the stocks in the market drops, then demand shares increase and form a support level.
Resistance is just the opposite of the support level, where there is a change in the price level of an uptrend. The increase in price pauses because of the high supply of security or the selling interests. We can understand it by taking the same example of support where the stock price rises and sell increases of the shares and thus creates a resistance level.
The support and resistance levels help traders to identify the entry and exit points of the forex trade. Once they reach any of the two zones, the prices either bounce back from the support and resistance levels or violate the price level and continue to hit the subsequent support and resistance level.
Traders can, with support and resistance level, determine the price changes and entry and exit points. But, if the forecast is wrong, then they can exit the market with some loss. The position can be closed quickly by the traders. If the price goes in the accurate direction, then traders can enjoy high profits.
By now, it has been clear that traders can use support and resistance to analyse the price fluctuations. Several experts use these price levels to prevent themselves from the sudden changes. Traders can analyse the price fall and rise with the strategies. This helps them to open or close a position in the forex market. It could be held for long and short term duration as per the market directions. With the charts, resistance and support levels are decided.
For example, Harry has been holding a position in the market for a long period of time with the expectation of an increase in the price of the security. Resistance and support levels are visible through charts called the support and resistance lines to help recognise the change easily. If Harry feels that the price will rise but notices a resistance situation, he will try to sell, and if there’s support, the trader would intend to buy the securities.
So, Harry would decide on the price level movements that are the trading support and resistance to enter or exit the forex market. The charts aid in identifying the support and resistance levels that would benefit the investors in return.
Major vs Minor Support and Resistance
Support and resistance zones strategy are widely used concepts globally in the forex trade. There are minor and major support/ resistance zones of the forex trade. For some time, the minor support or resistance delays the rise and fall of the security prices in the forex market. Whereas major support or resistance pauses either of the two, the rise or fall of the price leads to the forex market change in the price direction of the currencies.
The minor support/resistance price is visible on the chat patterns through horizontal lines representing the zone/area. The line may be previously served as the support or resistance price. Thus, the transformation in the price is noticeable. The support level becomes resistance and vice versa.
Types of Support and Resistance
There are four types of support and resistance levels in the forex market, which could be recognised for a better trade. Here we have discussed the four types of levels:
The support and resistance levels are often represented in round numbers. The round number price levels host many pending buying and sling orders of the forex market. The participants of the market hold these numbers and analyse the market for the different zones. For example, 1.2, 1.50 or such exchange rates of a currency pair like EUR/USD are the essential support and resistance levels.
The support and resistance levels also form at the trendlines or channels. The chart shows the support and resistance levels of a currency pair for some time, such as 10 to 15 minutes. The price tests are made on the trendlines and aid to analyse the price levels whether they bounce back or continue.
The Fibonacci analysis tool of support and resistance level is used at the time of corrections. These identify the price levels during the correction period of the forex market. The Fibonacci levels act as floor and ceiling indicators for the price.
Technical indicators such as central pivot points and other factors are used to spot the forex market’s support and resistance levels. Indicators are available through the trading platform software online. MetaTrader4 is the most common and popular trading platform of the forex market with more than 30 indicators.
Switch of roles
The support and resistance trading levels can switch roles during some fluctuations. For example, if the price level goes below the floor level for a particular currency pair, then there are increased chances that it may come out as a resistance level in future trade. Similarly, the opposite can happen in the market; the two change the roles when needed. The situation raises the requirement for a pullback strategy in the market. In pullback, the price returns to the previous support and resistance level. This happens for the continuation in the breakout direction.
The switch could be analysed in the chart patterns and helps in creating a trading strategy.
Advantages and Disadvantages of Support and Resistance
Both the price levels have several strengths and some weaknesses. Let’s quickly check them out:
- Information on dynamics of the market
- Define price fluctuations
- Help in deciding market entry and exit points
- Applicable on any timeframe and trading instruments
- Determined with charting tools and indicators
- Used through trading platforms such as MT4
- Provides ready-made solutions and expert advice
- Includes trading strategies
- Generates signals on the time frames
- False breakdowns
- Presence of slippage (backlash)
- Requires knowledge for the study of factors
Difference between Support and Resistance
The difference between floor and ceiling is necessary to be understood as the study of the two cannot help traders identify the roles while trading. Therefore, we should know what support and resistance are with their differences. Support as the word is, it supports the price movements. Thus the price relies on support during price movements.
Support connects the low prices and occurs when the market traders do not want to sell the forex securities. On the other hand, resistance connects the high prices of the market and stops prices from rising further.
However, both can change their prices during a breakout.
Levels of Support and Resistance
The forex market’s support and resistance levels could be calculated in various ways, which is why it has different levels. These are based on the horizontal, sloping and dynamic levels.
The trading platform used in the forex market, MetaTrader4, helps the traders to use the horizontal lines on the chart patterns to analyse the support and resistance trading. It shows the historical or, we can say, the previous support and resistance points where rebound occurred. In this, the support level is drawn with the low prices and resistance with the high prices of the securities.
The lines could include candles and their shadow forming the horizontal levels for prediction of trade. In the support and resistance zones, if there is a deviation of several points is the norm, and the higher timeframe widens the zone.
Sloping levels are similar to the horizontal level in respect to the impact of price. Here, the lines of the level are formed in the sloping position; the angle of lines differentiates this level from the horizontal level. The level depends on the direction of the trend and is drawn as per the local lows and highs. In the sloping level, the price bounces back, and with two points, the level is shown in the chart patterns.
The sloping level may also be referred to as the trend line. Thus, the price level could be identified with the opposite parallel lines and help find the market’s entry point.
The technological developments in the trade have enhanced the levels from manual markup to indicators such as Moving Average, Bollinger Bands etc. These are the dynamic levels that are used in forex market trading for analysing the price movements. However, these are volatile and are rearranged as per the price; this acts as their weakness and strength both. Nevertheless, horizontal and dynamic levels share the same principles and properties of use.
How to trade forex with support and resistance?
An investor can use the following strategies to use support and resistance effectively for the forex trade. Forex trade is related to international currency trading or foreign
exchange currency trade. Therefore, it is highly uncertain and has several risks associated with market trading. Support and resistance will guide a trader in analysing the prices and forecast the entry and exit positions.
Strategy 1: Buying bottoms and selling tops
The first strategy of using support and resistance in the forex trade is that a trader must open in strong resistance and support zones. It is advisable to trade in strong zones due to the risk of price breakouts. The trader has to keep these points in mind while forex trading:
Buy order during the support level:
- The entry-level of the trade should be when the price touches support and rebounds
- Stop-loss must be set at the lowest price before rebounding
- Take profit order must be at the point when the price touches old resistance formed previously
Sell order when the price reaches resistance:
- Entry-level should be when the price touched resistance and drops back
- Stop-loss should be the highest price before falling of price
- Take profit should be set when the price reaches the previous support level
Strategy 2: Breakout and Retests of the price
Strategy two takes place when the breakout occurs in the support and resistance levels and prices retests—comparatively, a safer and secure strategy than the first strategy with comfortable trading sentiments.
Buy order during resistance level:
- The entry point is when the price retests and rebounds
- Stop-loss should be set near the support level to the price breakout
- Take profit should be near the resistance level formed previously
Sell order during price breakout of support level:
- The entry point is when the price retests and falls back
- Stop-loss is near the resistance area of the price breakout
- Take-profit is set when the price touches the previous support level
Traders and investors of the forex market must master the skill of using support and resistance levels in their investments to analyse the price movements. A strategy that is useful for traders to open and close positions in the market and analyse the market trends. Support and resistance both aid traders in predicting the prices with the use of indicators through trading platforms. Many indicators could be used in the forex market trade, such as Moving Average, Bollinger Bands, Relative Strength Index, MACD etc.
Highly used technical analysis tools of the trading market, support, and resistance are like the floor and ceiling of the trade, respectively—a significant strategy for analysis and price forecast.
ETFinance is a broker that would guide and facilitate the traders with all services to take advantage of support and resistance. Therefore, I would recommend our readers to trade with the ETFinance brokerage firm.