Before explaining about Support and Resistance levels and what are they really, You should first understand what stands behind it. Well, Forex, or foreign exchange trading, is a global and worldwide market for trading currencies. It involves all forms of buying, selling, and exchanging currencies at current or pre-determined prices.
Buying and selling of currencies at desired levels is the most salient requirement for a trader and of utmost importance. ‘Buying low and selling high’ is one the most famous saying in the business world.
And hence the concept of support and resistance. Support and resistance are one of the most extensively used concepts in forex trading.
Resistance in simple terms is the area where the price of currencies stops after moving upwards and then moves downward after that certain point. Resistance is not just an irregular area where price turns around.
There are potential sellers and traders who have sold a Forex currency once before and remember the collective power they had to push price lower. Resistance acts a ceiling that bars any further upward change in price.
Whereas, support is a lower limit where the price has reached a temporary minimum and eventually starts to go up. A resistance level, once penetrated, can turn into a support level whereas the same can happen to a support level, which may turn into a resistance level.
Why It Happens
The leading reasons why prices act in this behavior is due to supply and demand and market psychology. At support levels, the number of buyers usually eclipses the number of sellers and thus enabling the price to go back up. On the other hand, at resistance levels, the total number of sellers exceeds the number of buyers leading the price to go back down to previous levels.
This could occur regularly in a range until new material data is available that causes a shift in the price to a new area, in which case a new support and resistance level would be established.
The Importance of Support and Resistance
The big benefit of support and resistance levels is that they can be easily differentiated. Support and resistance test is a significant part of trends because it can be used to help make trading decisions and determine when a trend may be shifting.
These levels can occasionally help a trader identify when to make a profit. For example, if a certain price level is reached, the trader might want to take profits because he/she knows the price level seldom rises past a particular resistance level.
Or alternatively, if the trader establishes a support level and if the price rarely falls below, he/she could use that information to help them come to a conclusion on an entry point to their position.
In conclusion, trading forex using support and resistance can be one of the most effective ways of strongly predicting future price changes.
Not only do areas of support and resistance show traders the position and behavior of the market as a whole, they can also show forex traders when not to make a trade.
Support and resistance, therefore, creates a virtual map, in the process showing traders where the price has previously decreased or increased.
Having the expertise to predict where the bulk of market orders exist is a powerful source which can be studied using the simple analysis of any forex chart.