Hello and Welcome to the ditto educational series that will provide you with the skills you need to become a forex trader!
Today we are going to look at one of my favourite subjects and that is support and resistance. I can not stress enough how this is one of thee most important subjects in forex trading. Whether you are a beginner or an advanced trader Reading support and resistance correctly can possibly matter most in terms of ensuring you seeing opportunity for high probability trade set ups in the forex market.
Support and resistance is possibly the most commonly used technical analysis tool among forex traders. The concept is undoubtedly a widely discussed topic and closely monitored by traders,brokers and speculators.
When you start analysing chart patterns, which are the wavy lines that our candlesticks form over time, you will start to notice that there are certain price levels that the market seems to respect, Some more than others but there is a clear indication that these barriers are unlikely or less likely to allow price to move through.
At first, the explanation and idea behind support and resistance and identifying their levels may seem to be a easy one, but as most beginners discover, support and resistance can come in various forms, and the subject is more difficult to master than it first appears.
So what creates Support and Resistance?
Support is a price level where a downtrend can be expected to lose momentum,stop and possibly reverse due to a concentration of demand in the market. As the price of a currency pair drops, demand can increase, and then a support line may begin to form.
Alternatively, resistance levels can form due to a selling off when prices increase.
Over time areas or zones as they are sometimes known, and they are called this due to them not being exact specific prices in the market. support or resistance will been identified.
These can provide valuable high probability potential trade entry or exit points and should be keenly observed.
The reason for this is because, as a price reaches a point of support or resistance, it will do one of two things – it will either be immediately rejected away from the support or resistance level, or it will plow through the price level or zone and continue in its direction or trend – until it hits the next support or resistance level.
Most trades taken by almost every type of trader in forex are based on a belief that support and resistance zones will be respected and not be over run, we have talked about risk management in a previous educational video and perhaps now you see how this may apply.
Whether price is rejected by the support or resistance level, or there is a break through, traders can use probability based decision making on the direction of market price and can quickly determine if they are correct.
If the price moves in the wrong direction according to your analysis, the position can be closed at a small loss. If the price moves in the right direction, however, the move may be substantial. We discussed this in our risk reward video and I want you to think about how the two subjects interlink.
What happens when support or resistance is broken?
When we see that price has not been respected and a valuable support or resistance level has been broken, traders may look to trade the continuation of a trend by entering on the retracement to the broken level. When price has broken through usually their will be a short retracement before the continuation and it’s this level that traders may be inclined to place their trades whether it’s a buy or sell. Again with trading probability and risk reward we can place our stops at a reasonable position and look to take advantage of the market break out. Be careful not to place your stop to closely and don’t assume you are seeing a breakout if you are using a very low time time frame. False breakouts can occur just as often as actual ones.
Support and resistance levels and zones are one of the key concepts used by technical analysts and work in conjunction with a wide variety of technical analysis tools.
The key properties of support and resistance consist of a support level, which can be thought of as the floor under trading prices, and the resistance level, which can be thought of as the ceiling.
When Prices drop and test the support level the possible outcomes are price will either “lose momentum,” and the price will bounce back up, or the support level will be broken , and the price will drop through the support and likely continue lower to the next support level.
When we Determine future levels of support it can drastically improve our chances at entering high probability trades. Whether you are entering a trade or seeing that support level as a possible take profit or exit price, previous levels of support in that area give us a glimpse at a probable future that your strategies can be build on. These zones are